February 2023 Revenue Report
The Arkansas Department of Finance and Administration (DFA) reported today that February net general revenue was $4.6 million, or 1.1%, below last February but $55.5 million, or 16%, above the February forecast. This $55.5 million added to the surplus for the year brings the total surplus above the last adjusted forecast to $250.2 million or 5.6%. In addition, the last forecast adjustment included over $400 million in surplus which would bring the total being carried for the fiscal year to over $650 million.
A cursory review of the February report begs the question of how net general revenue can be less than last year but substantially add to the fiscal year surplus. The answer lies in the timing of processing Individual Income Tax refunds compared to last fiscal year. Individual income tax refund totals are subtracted from collections to determine net general revenue. The total dollar amount of refunds can vary because of the number of refunds processed or the amounts claimed on the refunds. Numbers of returns processed can vary based on when the IRS begins their processing, the timeliness of DFA processing, law changes, and other factors. Refunds have historically been monitored daily to ensure that taxpayers receive their refunds timely as well as to predict the timing and amount of payment as it affects the State treasury. DFA forecasted February Individual Income Tax refunds to be $101.4 million, which is almost double last February’s $52 million; the actual refund amount was $104 million. This additional $52 million subtracted to get the net total resulted in February net general revenue being less than last year.
The tax collections and economic side of the February revenue report was very positive for general revenue. DFA reported that results were above forecast in all major categories, which explains the $55.5 million above forecast for the month. Individual Income Tax Collections were $13.9 million, or $5.6%, above forecast. DFA reported that, “Individual Income Tax collections were above forecast in a variety of components, including Withholding and non-Withholding categories.” This is an especially important positive note as the state absorbs recently-enacted tax cuts that impact these areas.
February Sales and Use Tax exceeded forecast by $27 million or 11.7%. DFA reported that most major reporting sectors “displayed high growth rate over the prior year.” They attributed the high growth rate to economic expansion in many sectors. Motor vehicle sales tax was reported up 11.6% from last year.
Corporate Income Tax also contributed to the additional surplus. Corporate collections were $15.6 million above forecast in a usually very low collections month. Last February, only $7 million was collected in Corporate Income Tax. As always, with any aberration in Corporate Income Tax, it must be pointed out that Corporate Income Tax collections are historically volatile and hard to predict. This could just be a payment timing issue from one or more corporate taxpayers that is offset later in the year rather than the result of economic activity.
The State surplus continues to grow as lawmakers contemplate additional spending for prisons and schools, as well as new tax cuts. It will be interesting to see if DFA and the Governor raise the forecast before the session ends based on current collections and future economy. This could provide the basis for new spending and tax cuts. However, the current forecast might be retained for a conservative approach in light of economic predictions. Whichever direction is taken, there will be a substantial surplus of “one time money” to use for some expenditures or as backup if the economy should falter. Lawmakers will certainly have serious deliberations on the new forecast and budget as the legislative session continues.