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Financial outlook for state turns out rosier than feared

by Neal Earley | April 12, 2021 at 1:00 a.m.
FILE — The state Capitol is shown in this file photo.

One year ago, the financial forecasts for Arkansas were pessimistic, but local officials are grateful the projected fiscal cliffs were overstated.

At the beginning of the pandemic last April, businesses were reeling from closures. Arkansas' unemployment rate was 10%, higher than it had been during the peak of the last recession in 2008-2009 and the highest since April of 1983, according to the Bureau of Labor Statistics.

Revenue took a hit as the General Assembly approved a $5.89 billion budget with $212 million unfunded.

Like much of the country, Arkansas' financial outlook was bleak, but now a year later, local and state tax revenue has exceeded forecasters' projections.

A revenue report for Arkansas from March showed the state's gross collection this fiscal year, which started July 1, were 11.3% above forecast. Income, sales and corporate taxes were all above what forecasters previously projected.

"We're doing better in fiscal year '21, along with a lot of other states," said John Shelnutt, administrator for economic analysis and tax research at the Arkansas Department of Finance and Administration. "I think they just misjudged the nature of this downturn and the nature of the rebound."

Since the unemployment rate ballooned to 10%, it has steadily dropped to 4.5% in February, the lowest since the pandemic began.

For fiscal 2021, Arkansas income-tax revenue was up 7.3% and outpaced projections by 12%, according to the finance department.

Sales-tax revenue also increased -- a trend officials attributed to the state's online sales-tax law enacted by the Legislature in 2019.

With many people working from home, spending patterns didn't change. While people were less likely to make trips to retails stores, online shopping increased, offsetting any potential losses in sales-tax revenue.

For cities and towns, sales taxes are the primary source of revenue for many municipal budgets. With businesses shut down, many predicted cities would take a huge hit in revenue, said Mark Hayes, executive director of the Arkansas Municipal League.

"I was very concerned that with local businesses not getting nearly as much traction that, you know, it would affect the city's bottom line," Hayes said. "As fate would have it, the online sales tax has mitigated that somewhat."

Even in tourism-dependent Hot Springs, sales-tax revenue increased 5.23% from the previous year, according to a February report from the city. The report said online sales taxes "provided stability to our revenue collections," making up for losses in the hospitality and retail sectors.

"I think the sales tax has been buffeted by the wise decision of the Legislature in the last session to implement the internet sales tax," said Chris Villines, executive director of the Association of Arkansas Counties. "So a lot of the people who have shifted to home are still paying sales tax on the same items that they would have gone to Walmart and gotten."

But the hurt of bricks-and-mortar retail could have lasting effects on property tax revenue and for the economy.

Chris Moses, president and CEO of real estate firm Newmark Moses Tucker Partners, said his company has had to borrow money to pay its obligations as many of the company's commercial tenants are unable to pay their rents during the pandemic.

While property-tax revenue in Pulaski County has remained steady during the pandemic, the future of retail and commercial properties could mean trouble down the line, Moses said.

"Over the pandemic, I would say for our firm alone, from the retail side 80% of our tenants have asked for abatement, concessions," Moses said. "And their inability to pay their agreed-upon lease rates has caused issues in property values as a whole."

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