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State general revenue beats March forecast

$569.7M total is 0.1% less than a year ago by Michael R. Wickline | April 3, 2021 at 3:32 a.m.
The Arkansas flag is shown in this file photo.

Arkansas' general revenue collections in March were about $400,000, or 0.1%, less than they were the same month a year ago, to $569.7 million, but beat the state's forecast by $48.5 million, or 9.3%.

March's sales and use tax collections increased slightly over the same month a year ago, while individual income tax collections slipped a tad, the state Department of Finance and Administration said Friday in its monthly revenue report.

Collections of both taxes in March exceeded the latest forecast from April 2, 2020, a projection that was based on an anticipation of an economic recession spawned by the covid-19 pandemic.

The record general revenue collection for any March continues to be $599.3 million collected in that month in 2019, said Steve Wilkins, a tax analyst at the finance department.

"The monthly revenue report continues to be good news and reflects increased consumer and business spending," Gov. Asa Hutchinson said.

The report reflects that more people are going back to work and job creation is picking back up, the Republican governor said in a written statement.

The year-to-date surplus is $549.9 million and "this healthy surplus puts the state in a position to continue to increase our long term reserve balances, which is an important priority," Hutchinson added.

Tax refunds and some special government expenditures are taken off the top of total general revenue, leaving a net amount that state agencies are allowed to spend.

The net in March increased by $16.3 million, or 4.6%, over the same month a year ago to $372.9 million, outdistancing the forecast by $20.8 million, or 5.9%.

March is the ninth month of fiscal 2021, which ends June 30.

During the first ninth months of fiscal 2021, net general revenue increased by $409.3 million, or 9.6%, over the same period in fiscal 2020 to $4.6 billion, exceeding the forecast by $549.9 million, or 13.3%.

The results include net collection increases from the state shifting its individual income tax filing and payment deadline in 2020 to July 15 from April 15 to match the federal government's extension of that deadline because of the pandemic. This year, the state has shifted that deadline to May 17 from April 15 to match the federal government's extension.

The amount of net general revenue over forecast for the nine-month period in fiscal 2021 is a record, since at least fiscal 1991, according to Wilkins.

John Shelnutt, the state's chief economic forecaster, said he expects the temporary surplus of $549.9 million to decline with an expected increase in individual tax refunds in the next few months.

The net available revenue in March was "a mix of better than expected collections in gross revenues and partial catchup in tax returns received and processed with refund claims after delays in the start of accepting efile tax returns by the IRS in February," the finance department said Friday in its revenue report.

"Further delay in refund claims stems from law changes during the filing season in the treatment of unemployment insurance benefits at both the federal and state levels," according to the department.

Individual income tax refunds were $30 million above forecast in March after falling $76.2 million below forecast in February, the department said. "Additional catchup in return filings and refund processing is expected in April."

Shelnutt said the IRS and finance department are "working on those returns that were already filed with unemployment benefits in their income [and] that has to be backed out."

"The IRS says they are going to do that in May. I think DF&A will be doing the same thing," he said.

Finance department spokesman Scott Hardin said 55,000 taxpayers filed state income returns with unemployment benefit income prior to March 1, the effective day of Act 154 that exempts those benefits in 2020 and 2021 from state income taxes.

In its fiscal session in April 2020 , the Arkansas General Assembly enacted a $5.89 billion general revenue budget for fiscal 2021.

The April 2, 2020, forecast will provide $5.68 billion in general revenue for that budget, leaving $212.2 million unfunded. If the net general revenue exceeds $5.68 billion in fiscal 2021, the additional money would cover at least part of the unfunded portion of the budget.

The top individual income tax rate dropped from 6.6% to 5.9% on Jan. 1, the second cut under Act 182 of 2019. State officials originally projected Act 182 would reduce general revenue by $48.5 million more in fiscal 2021.

BUDGET AND TAX CUTS

Sen. Jonathan Dismang, R-Searcy, said Friday that legislative leaders haven't started negotiations with the governor over the state's Revenue Stabilization Act.

The act prioritizes the distribution of general revenue to state-supported programs each fiscal year, and there is no consensus on how to use surplus funds and which tax cuts to enact, Dismang said.

"Supposedly, we are going to have our first meeting next week," Rep. Lane Jean, R-Magnolia, said.

In November, Hutchinson proposed a $5.84 billion general revenue budget for fiscal 2022. Most of the increase would go to human services, public schools and public colleges and universities.

The governor proposed devoting $100 million of the $240 million surplus collected before fiscal 2021 to the state's long-term reserve fund, which he has called a savings account.

The reserve fund has $209.9 million, and the governor aims to boost that fund to $420 million by the end of his term in January 2023.

Hutchinson has called on the General Assembly to approve $50 million a year in income tax cuts for moderate- and low-income Arkansans, and reduce the top income tax rate from 5.9% to 4.9% for new residents for five years, with the eventual aim of reducing the top rate for everybody else to 4.9% over a five-year period. State officials project cutting the top rate to 4.9% would reduce state general revenue by $275.6 million a year.

The governor has proposed to cut the sales tax from 6.5% to 3.5% on used vehicles priced between $4,000 and $10,000. Used vehicles priced at less than $4,000 are exempt from the tax.

Jean said some people people think the state can afford $50 million in tax cuts, others favor $25 million in tax cuts, and others don't think the state can afford any tax cuts in fiscal 2022.

There also could be $300 million to $400 million in surplus funds available, including the $240 million accumulated prior to fiscal 2021, he said.

MARCH REVENUE

According to the finance department, March's general revenue included:

• A $3 million, or 1.1%, decline in individual income tax collections from a year ago to $286.5 million, which outdistanced the forecast by $34 million, or 13.5%.

The largest category of individual income taxes is withholdings.

They declined by $12.4 million, or 5.1%, from a year ago to $229.2 million, but exceeded the forecast by $23.3 million. The dip in withholdings reflected income tax reductions with withholding formula changes and continued covid-19 impact on the labor market.

"The forecast is more pessimistic than what is actually shown here," Shelnutt said.

• A $4.7 million, or 2.3%, increase in sales and use tax collections over the same month a year ago to $212.7 million, which exceeded the forecast by $7.3 million, or 3.6%.

Motor vehicle sales tax collections in March increased by $10.9 million over the same month a year ago to $40.1 million in a rebound after a week of snow eating into sales in February, while retail sale tax collections remitted to the state based on sales made to consumers in February "was a smaller gain than it has been in prior months of stimulus surge" because of the snow week, said Shelnutt.

Sales tax collections from restaurants and accommodations last month declined by $2.9 million from a year ago to $15.5 million, he noted.

• A $1.9 million, or 7.1%, decrease in corporate income tax collections from a year ago to $24.3 million, which beat the forecast by $6.1 million, or 33.8%.

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