SEPTEMBER 2024 REVENUE REPORT

TAX COLLECTIONS DIMINISHED BY LARGE ECONOMIC DEVELOPMENT INCENTIVE

REVENUE ANALYSIS

The Arkansas Department of Finance and Administration (DFA) paid out an economic development incentive to a business last month, reducing September general revenue by $11.3 million. DFA released the September General Revenue Report today, indicating that total general revenue was $7.8 million, or 1.1% above forecast, after absorbing the economic development incentive payment. The amount over forecast in September brings the total fiscal year surplus to $17.7 million, or 1.0% above forecast.

The $11.3 million incentive payment was part of the “Tax Back” incentive program and was deducted from the Sales and Use Tax collected in September. DFA reported that, as a result, Sales and Use Tax was $17.6 million less than last September and $17.5 million or $5.9% less than forecast. DFA noted that even without the incentive payment, collections would have been 6.2% below forecast. This fiscal year, sales tax collections are weakening compared to actual collections last year and the forecast. After three months, Sales and Use Tax is below forecast by $5.4 million, or 0.6%. This trend of minimal growth in Sales and Use Tax is especially concerning as an economic indicator when there is normal inflationary price growth in Sales and Use Tax and we continue in an inflationary period.  

Individual Income Tax continued to outpace forecasts in September, even with recent tax cuts. Individual Income Tax collections exceeded last September’s by $16.1 million, or 4.6%, and beat the forecast by $27.4 million, or 8.1%. DFA reported that payroll withholding and estimated tax payment categories were driving the increase, signaling that the income side of the economy is performing well while the expenditure side, as reflected in sales tax, is slowing.

Corporate Income Tax collections were $17.7 million less than last September, though this was only $3.7 million below DFA’s forecast.

As the state prepares a new budget for legislative review this fall, and with plans for potential tax decreases, total state tax collections remain on track. Future additional growth will be necessary to support program increases or further tax cuts unless spending reductions are made in existing programs. While one-time expenditures can be funded from prior-year surpluses, it seems unlikely that significant surplus will be generated this year following previous tax cuts.

The parties responsible for budget planning should be concerned with the developing trend in Sales and Use Tax, which is not keeping pace with inflation. A thorough study of reporting by sector and an adjustment for inflation must be considered to determine the stability of Sales and Use Tax. Speculation could be that the reduction in federal subsidized spending is contributing to the slowing. The state must anticipate whether this trend will persist and impact future economic growth.

This month’s Revenue Report also demonstrates the cost of economic development incentives and their effect on the state budget. Historically, the state's economic development planners have conducted a Return on Investment analysis for each project to ensure that the business receiving the payment generates sufficient payback to the state. Hopefully, those calculations will prove accurate, and large incentive payments like the one this month are anticipated in future revenue forecasts.

The September 2024 revenue report may be viewed and downloaded here.