OCTOBER STATE REVENUE ABOVE FORECAST BUT NO SIGNIFICANT SURPLUS
The Arkansas Department of Finance and Administration (DFA) reported today that, four months into the fiscal year, general revenue exceeds forecast by $23.1 million, or 1%. In the month of October, general revenue was above forecast by $5.4 million, or 1.1%.
At the last forecast update, DFA announced an expected surplus of approximately $230 million. To meet this surplus expectation, revenue in the final eight months of the fiscal year would need to exceed projections by ten times the amount of the first four months.
In recent fiscal years, the State has become accustomed to historically high surpluses. In response to this overabundance of tax revenue, the legislature reduced Individual Income Tax and Corporate Income Tax rates. This fiscal year, the lower tax rates are resulting in collection totals below those of last fiscal year. The current forecast reflects DFA’s estimates of the impact of these tax cuts. So far this fiscal year, those estimates have been almost exactly on target. Although revenue is making forecast, it does not appear to be approaching the anticipated surplus.
DFA reported that October Individual Income Tax collections decreased by $31 million, or 10.1%, compared to the previous year. However, collections were $11.2 million, or 4.2%, above forecast. DFA reported that a payroll timing issue, which resulted in an extra payroll date in October, contributed to the decline in collections compared to last October. Despite this, collections exceeded the forecast due to increases in Withholding Income Tax and Income Tax Estimate payments. These payments reflect current income earnings and are a positive sign for the State economy.
Sales and Use Tax Collections exceeded last year’s by $11.7 million and were $8.3 million, or 2.9%, above forecast. For the fiscal year, Sales and Use Tax is only $16.8 million, or 1.5%, higher than last year’s collections. With no significant new exemptions, Sales and Use Tax collections should experience a normal inflationary increase over last year. However, a future comparison with the inflation rate could raise concerns about the outlook for Sales and Use Tax collections.
Corporate Income Tax collections totaled $22.5 million, which was $11.9 million less than last year and $10.4 million below forecast. Corporate Income Tax collections have a history of being sporadic and unpredictable. Only a review of returns could determine whether this shortfall is due to timing issues or underlying economic factors.
In a few days, Governor Sanders and DFA will present a new revenue forecast to the Legislature, which will be used to plan the budget for the remainder of this fiscal year and the next two fiscal years. It will be interesting to see if the administration still expects a $230 million surplus this year and whether they expect Sales and Use Tax to grow with the economy and exceed inflationary price increases. This forecast will set the tone for the legislative session early next year and may affect the prospect for additional tax cuts and spending in the next two-year budget.