Arkansas lawmakers see the largest state budget surplus in history as more of a one-time windfall than the beginning of a trend, a number of them said.
At least for now.
"I believe we should save the surplus," said Sen. Bart Hester, R-Cave Springs. "If we spend the surplus now, it will be on wants, and puts needs in jeopardy during an economic slowdown."
Northwest Arkansas' economy appears strong in the aftermath of the covid-19 pandemic, but he isn't so confident about the economy in the rest of the state, Hester said.
Legislators in that region want to spend some of the expected $1 billion surplus, while still others advocate returning some of the money in the form of tax breaks.
No one knows what the economy will look like after a once-in-a-century pandemic and the related federal government spending.
"I know many of my colleagues will make the case for additional tax cuts, but we're not guaranteed a surplus every year," said Sen. Greg Leding, D-Fayetteville. "I think it's better to think of surpluses as one-time opportunities -- so building a plan to cut taxes based on the fact that we got lucky this year doesn't seem smart."
The pandemic's economic brakes was expected to devastate state budgets. It did in states such as Nevada and Hawaii, heavily reliant on out-of-state tourists, state financial figures show. Total state revenue collections throughout the United States plunged 31.9% in April 2020, according to a study by the Pew Charitable Trust.
States' revenue has largely rebounded but didn't reach prepandemic levels until last month, the study shows. A year's worth of revenue growth disappeared even with the recovery, figures show.
Federal spending to forestall the economic damage found its way into state coffers directly, through aid to states, and indirectly from taxed consumer spending of federally funded stimulus checks to individuals.
Arkansas is getting almost $1.6 billion from the most recent relief package, the American Rescue Plan, and got $1.25 billion from the earlier federal Coronavirus Aid, Relief and Economic Security Act.
Gov. Asa Hutchinson predicts a $1 billion state surplus when the fiscal year ends June 30, he said earlier this month. The most recent fiscal figures support his prediction. General revenue collection in May hit $822.8 million -- 70.8% more than the same month last year.
That figure is partially skewed by delayed state income tax receipts in May 2020. State sales taxes normally come due in May, but the filing deadline was delayed to July in 2020 because of the pandemic's disruption to businesses and other taxpayers.
"Right now, the economy is based on people who have money in their pockets and a lot of pent-up demand," said Sen. Mathew Pitsch, R-Fort Smith, a candidate for state treasurer.
"They have money left over from stimulus checks and now have places to spend it," Pitsch said.
Covid-related restrictions on businesses, such as seating limits in restaurants, have ended. The spending boom pumps up state sales taxes and other revenue, he said.
But employers are having trouble finding workers, and it isn't clear how long current levels of spending will last, Pitsch said. He compared current consumer spending levels to the spending of someone who just had a winning scratch-off lottery ticket. It's not something to plot long-term trends upon, he said.
"I'd like to see what things look like when the economy is firing on all cylinders," Pitsch said. "I am very optimistic. I do see a tax cut coming." Details are needed, though, to tailor the size of the cut to reality, he said.
The state's one-time revenue surge could help pay for a significant portion of one-time infrastructure needs, said state Rep. Charlene Fite, R-Van Buren. In particular, the state needs to get broadband internet access to places that still don't have it, she said.
"Given the importance of broadband to education, work, telemedicine and public safety, using money from surplus funds seems entirely appropriate," Fite said.
"Today, I visited a low-water bridge and roadway in Crawford County that are in very bad condition," she added Wednesday. "The county doesn't have the funds for the needed repairs. Help from the state would be greatly welcomed."
Rural areas need help with water projects, and the Arkansas School for the Deaf needs major funding for new dormitories, she said.
The degree of support for tax cuts and the proposed timing varied among the lawmakers contacted.
"While I've always supported tax relief so long as it's done in a responsible way, we must be careful about dedicating one-time surplus money solely to make tax reductions that would be permanent," said Sen. Jim Hendren, an independent from Sulphur Springs.
"We have many needs including skyrocketing teacher insurance premiums, broadband deficiencies, child hunger, workforce education and the 4,700 kids in foster care," Hendren said.
"We should set aside some of the dollars to begin addressing these issues. We should also continue to strengthen our long-term reserve fund so we never find ourselves in a budget crisis and, finally, we should look at responsible tax relief."
The state's long-term reserve fund balance got as low as $184.9 million by December 2020, according to the Department of Finance and Administration. For comparison, the state's latest general revenue budget is $5.89 billion. The amount that remained in the reserve fund at the end of last year would have covered less than 12 days worth of state spending.
Rep. Justin Boyd, R-Fort Smith, said the state's fiscal picture should be clear enough by the fall for the Legislature to enact a major tax cut this year. The Legislature will convene again sometime in the fall.
The pandemic and legal battles delayed U.S. Census data by months. The Legislature must set new congressional district boundaries this year. The detailed census data needed to draw those four districts is expected by Sept. 30 instead of the usual arrival time this spring. This delay forced the Legislature to go into extended recess April 28 and to return when the data is available.
"It is important for our state to have a long-term reserve to help with bond ratings and to be ready for a future economic downturn," Boyd said. With those precautions in place, "We are in a great position as a state for a bold tax cut this fall," he said.
Rep. Gayla McKenzie, R-Gravette, also pointed out that the state's sales tax on internet purchases went into effect before the pandemic and has proved to be a large boost to state revenue -- too large a boost, she said.
"I believe that the internet sales tax that was passed in the 2019 session likely accounts for a great deal of this surplus," McKenzie said.
She agreed that not enforcing sales taxes on internet purchases gave online retailers an unfair advantage at the time, she said.
"However, I didn't support the internet sales tax since there was no corresponding agreement to lower the sales tax rate," she said.
When city and county sales taxes add to the state's 6.5% rate, she said, "folks across the state are paying close to 10% in sales tax in many cases." But the state did not collect the tax on internet sales before. Passing internet sales tax collections amounted to a large tax increase, she said.
"It's a regressive tax and simply too much. We can, and should, lower it for folks."