n May 2001, Judge Collins Kilgore issued a historic ruling in the Lake View School District v. Huckabee et al – the state’s current school funding formula is unfair to poorer school districts and provides inadequate funding for education. The case is expected to have major implications on education funding, other programs serving children and families, tax equity and fairness, and state and local tax systems.

This brief from the Arkansas State Fiscal Analysis (SFAI) is the third in a series devoted to the Lake View School District case, and examines sales tax exemptions and their impact on statetax revenues. Upcoming briefs will examine lotteries and gambling, property taxes, early childhood financing and low-income tax issues.

• “Mandatory” sale tax exemptions cost the state about $1.2 billion in lost revenue. “Discretionary” exemptions cost the state $582 million.
• Most of the revenue lost from discretionary sales tax exemptions directly benefits business or economic development (64%); 14% benefits nonprofit organizations, school districts or local governments; 5% benefits individuals; and 16% is of general benefit.
• At least 100 services, such as legal, accounting and medical, are not subject to sales taxes.
• Reducing or eliminating sales tax exemptions could generate new funding for education or other services, but also could impact the overall equity/fairness of the state tax system and economic development. The state should carefully examine the costs and benefits of reducing or eliminating exemptions.