September Revenue Report

SEPTEMBER STATE REVENUE COLLECTION NUMBERS: EARLY “TRICK OR TREAT”?

Halloween is of course days away. However, the Arkansas Department of Finance and Administration (DFA) revenue report issued today conjures up thoughts of “Trick or Treat”. On its face, the report appears to be a great treat for state coffers with September net general revenue $128.7 million or 20.2% above forecast. This increases the total year-to-date revenue above forecast to $174.8 million. A closer review of the report may indicate that the treat could actually be a trick that will disappear later in the fiscal year.

The DFA report attributes the September results as “above forecast in all major revenue categories … Individual and Corporate Income Tax collections accounted for $103.1 million of the gain, largely in Estimated Tax Payments. Sales Tax collection growths broad based across reporting sectors.”

September Individual Income Tax was $28.6 million more than last September and $38.8 million more than forecast. DFA reported that Withholding Tax from individual payrolls, which is a general economic indicator, was up 4% compared to last year.

Sales and Use Tax Collections were $29.7 million above last year and above forecast by $29.8 million, or 11.5%. DFA had forecast a flat, no increase Sales and Use Tax for September. They reported that rather than sales being flat, “Most major reporting sectors of Sales Tax displayed high growth over the prior year, reflecting continuing economic expansion in many sectors. Motor vehicle sales tax collections were up 2.0 percent from year ago September.”

Corporate Income Tax was $24.8 million more than last September and $64.3 million above forecast. DFA had forecast Corporate Income Tax to be $39.5 million below last year. Experts will tell you that Corporate Income Tax collections are volatile and most difficult to forecast for several reasons. Corporations have various fiscal years, and many file on fiscal years that are different from the state filing years. Corporate fiscal years may occasionally change. Corporations may also report and pay taxes other than expected when they have corporate investment reporting obligations or opportunities to pay state income tax to lessen federal tax obligations. Only an actual look at rightfully protected corporate income tax returns and specific corporation reporting patterns can reveal the whole story. Historically, DFA has been said to have contacted large corporate taxpayers in attempts to discern aberrations in their reports.

With the positive reported results by DFA and the statement that “Revenue Results were above forecast in all major categories,” the September bottom line $128.7 million above forecast might appear rock solid with no sign of becoming a trick. Two factors lead to concern. First, the total September forecast was $52.9 million less than last September actual collections. The amount above forecast was built on that low forecast. Secondly, volatile corporate income tax collections were above forecast by $64.3 million contributing substantially to the overage. Future months in the fiscal year will prove if these concerns are valid.

Even if the $128.7 million is part illusion or trick, the September collections are sound and generally growing in the right categories. DFA forecasting, which is used to build and fund the budget, remains conservative. Even if the big surplus number is a trick, good economic signs and collection trends continue.