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State sees surplus of nearly $1 billion after May tax collections

by Michael R. Wickline | June 2, 2021 at 7:30 p.m.

With the help of a rebounding economy and federal stimulus payments, Arkansas’ general revenue tax collections in May increased by $341 million or 70.8 % over the same month a year ago to $822.8 million and beat the state’s April 2, 2020, forecast by $327.8 million or 66.2 %.

May’s total general revenue collections represented a record for the month, but fell short of the state’s record for any month.

The previous record for the month of May is $496.2 million collected in May of 2019, while the record for any month is the $958 million collected in April of 2019, said Whitney McLaughlin, a tax analyst for the state Department of Finance and Administration.

The changes in the state’s individual income tax filing and payment deadline compared to last year accounted for part of the increase in general revenues in May compared to a year ago, the finance department said Wednesday in its monthly revenue report.

In 2020, the state shifted that deadline from April 15 until July 15. This year, the state shifted the deadline from April 15 until May 17. Both changes mirrored changes in the individual income tax filing and payment deadline by the federal government.

The state’s April 2, 2020, general revenue forecast for fiscal 2021 also is based on an anticipated recession in Arkansas spawned by the COVID-19 pandemic.

“Underneath all these issues, I think we are seeing a robust economy that is fueled in part by stimulus and partly by a V-shape recovery in most of the sectors,” said John Shelnutt, the state’s chief economic forecaster.

“We even have some evidence that restaurants actually are rising above their normal seasonal part right now. [People] are coming out and they are getting out,” he said.

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

In May, the state’s net general revenues increased by $289.3 million or 79.1 % over a year ago to $655.2 million, exceeding the state’s forecast by $263.2 million or 67.1 %.

During the first eleven months of fiscal 2021, the state’s net general revenues increased by $941 million or 18.2 % over the same period in fiscal 2020 to $6.1 billion and beat the state’s forecast by $980 million or 19.1%.

The results include net collection increases tied to the 2020 and 2021 income tax due dates falling in fiscal 2021, the finance department said.

Gov. Asa Hutchinson said Wednesday that the state’s $980 million current surplus accumulated so far in fiscal 2021 is the largest surplus in the history of Arkansas.

The state’s surplus for fiscal 2021 won’t be known until after state ends its fiscal year on June 30.

The state’s previous record surplus totaled $409.27 million at the close of fiscal 2007, said Scott Hardin, a spokesman for the finance department.

Rep. Lane Jean, R-Magnolia, said he’s not surprised by the state’s current surplus nearly reaching $1 billion so far in fiscal 2021.

“I think we are in this economy with a lot of federal money moving around,” said Jean, who is a co-chairman of the Joint Budget Committee. “I am worried about 2023 and beyond.”

Hutchinson said that state’s surplus accumulated so far in fiscal 2021 “underscores the importance of the belt-tightening decisions we made during the pandemic and the strength of our economic recovery.”

“The record surplus also tells us that this fall will be the right time to cut our individual income tax rate again,” the Republican governor said in a written statement.

“This surplus has been created despite reducing our tax rate this year to 5.9%. This shows we can fund education, raise teacher pay and protect public safety at the same time we are lowering our tax rate. It is all because our private sector continues to grow,” Hutchinson said.

In its fiscal session in April of 2020, the Arkansas General Assembly enacted a $5.89 billion general revenue budget. The April 2, 2020, general revenue forecast anticipated providing $5.68 billion, leaving the rest of the budget unfunded. With net general revenue exceeding that forecast by $980 billion so far in fiscal 2021, at least part of the unfunded budget in fiscal 2021 is expected to be covered this fiscal year.

On April 22, Hutchinson said state officials expected a surplus of about $600 million at the end of fiscal 2021 and expect similarly strong growth in tax collections in fiscal 2022 because of federal COVID-19 stimulus.

In this year’s regular session that recessed several weeks ago, the General Assembly enacted a Revenue Stabilization Act that will distribute $5.84 billion in general revenue in fiscal 2022 to state supported programs. Most of the increase over fiscal 2021’s budget will go to human services, public schools, colleges and universities and correctional programs.

The fiscal 2022 budget was based on an estimated net general revenue of $6.06 billion before the Legislature’s tax cut measures collectively reduced projected net revenue by $203.1 million, according to legislative records. The budget projects a $17 million surplus in fiscal 2022.

The tax cuts include $179 million from Act 248, which is COVID-19 relief program tax deductions and loan forgiveness; $3.1 million from Act 254, which exempted unemployment benefits from income taxes; and other tax measures enacted by lawmakers this year, according to the finance department.

Hutchinson has said that he wants to reduce the state’s top individual income tax rate from 5.9% to 5.5% over two years and wants to reach a consensus with lawmakers on a tax cut plan to consider before calling a special session in the fall.

Under a proposal drafted by the finance department’s Revenue Division, the top rate would drop to 5.7% on Jan. 1 and then to 5.5% on Jan. 1, 2023, and would include an adjustment for what is called a tax table cliff for the lower to middle-income tax table. The proposal is projected by the finance department to reduce general tax revenue by about $30 million in fiscal 2022; by about $57 million more in fiscal 2023; and about another $27 million more in fiscal 2024.

Jean said May’s revenue report “strengthen the governor’s position” on tax cuts.

“I think we have an opportunity to put even more money in the long-term reserve,” he said.

In April, state officials had estimated the long-term reserve fund, which has a balance of $209.9 million, could increase to $711 million with the help of surplus funds.

Jean said that the governor’s income tax proposal “is doable” and lawmakers in the fall will have the benefit of seeing at least a few more months of state general revenue tax collections before making a decision.

Asked about the governor’s income tax proposal, Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said he wants to consult senators about their ideas for income tax cuts first.

Rep. Monte Hodges, D-Blytheville, who serves on the House Revenue and Taxation Committee, said about the governor’s proposal, “I think we ought to be extremely careful.”

“We need to make sure we are not too aggressive in our tax cutting,” Hodges said.

May revenues

According to the finance department, the state’s general revenue in May included:

  • A $236.3 million or 100.4% increase in individual income tax collections over a year ago to $471.7 million reflecting the change in the income tax due from April 15 until May 17.

These collections beat the state’s forecast by $247.4 million or 110.3%, but the state’s forecast was not updated for the tax filing shift from April 15 to May 17 during this fiscal year.

Individual income tax withholdings is the largest category of individual income tax collections.

Withholdings totaled $243.1 million last month — a $36.8 million increase over a year ago — and exceeded the state’s forecast by $36.3 million. These collections reflected in part an extra Friday payday compared to a year ago and economic growth with more people working and more people working longer hours.

Collections from individual income tax returns and extensions totaled $213.4 million last month — a $193.5 million increase over a year ago — and beat the state’s forecast by $199.6 million.

Collections from estimated payments totaled $15.3 million last month — a $6 million increase over a year ago — and exceeded the state’s forecast by $11.6 million.

  • A $68.5 million or 33.3% increase in sales and use tax collections over a year ago to $274.2 million. The collections exceeded the state’s forecast by $49.8 million or 22.2%.

The sales tax growth in May “reflects greater reopening of the economy and pent up demand with stimulus,” said Shelnutt.

“Most of the sales [tax collected in May] represents economic activity in April and reported in May [with] motor vehicle sales being the one exception that kind of hit a crossover,” he said.

Many people received $1,400 federal stimulus payments in March.

Retails sales tax collections in May increased by $32.5 million or a 37.7 % from $86.2 million a year ago, Shelnutt said.

Sales tax collections from restaurants in May increased by $10 million or 70% from $14.3 million a year ago, while sales tax collections from motor vehicle sales increased by $7.5 million or 26% from $29 million a year ago

  • A $25.6 million or 169.3% increase in corporate income taxes over a year ago to $40.6 million, beat the state’s forecast by $22 million or 118.5%.

“Corporation income tax collections from large accounts continue to exceed expectations,” Shelnutt said. “We had a pretty conservative forecast … in that category year by year because it is so volatile and has been a problem in the past, but it is doing well during the pandemic.”

  • A $1.4 million or 7.7% increase in tobacco tax collections over a year ago to $19.3 million, exceeding the state’s forecast by $2.7 million or 16.1%.

Monthly changes in tobacco tax collections can be attributed to uneven patterns of stamp sales to wholesale purchasers.

  • A $5.5 million or 119% increase in casino gaming revenues over a year ago to $5.5 million, which beat the state’s forecast by $3.4 million or 161.2%.

“With casinos shut down in April 2020 and taxes paid lagging one month, we did not collect any casino revenue in May 2020,” said Hardin.

That boosted casino gaming revenues for fiscal year 2021 to $34.5 million, a $3.3 million or 10.7% increase over a year ago.

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