STATE REVENUE SURPLUS CONTINUES TO GROW AFTER TAX CUTS
The Arkansas Department of Finance and Administration (DFA) reported today that after the first six months of the fiscal year, net general revenue was above forecast by 6.7% or $216.4 million.
December revenue was above forecast in all major collection categories and exceeded forecast by 12.2% or $72.3 million. The 2024 legislative fiscal session begins April 10 with three more revenue months prior to the session. The trend appears to continue for above forecast revenue collections, which will build a substantial surplus as the Governor and legislature consider financial needs of the state in the fiscal session.
Individual income tax collections exceeded December 2022, even after recent tax reductions were absorbed. Individual income tax was up 1.8% or $5.1 million over last December, exceeding forecast by 10.9% or $29 million. DFA reported that individual income tax collections were “driven by non-withholding tax categories”. However, withholding tax was reported to have increased by 3.6% after having been lowered by withholding tax rate reductions. December’s income tax performance indicates a healthy economy as payments are up in all individual income tax categories. Even with recent state economic reports of slightly higher unemployment rates, Arkansas taxpayers are earning more income than expected. This usually indicates more people working or people are working more.
Sales and use tax was above last December by $8.8 million or 3%. Collections exceeded forecast by $5.1 million or 1.7%. DFA reported that “Major reporting sectors of Sales Tax displayed mostly higher growth over the prior year reflecting continuing economic expansion in many sectors.” This is further indication that the State economy is performing well. Today’s report did not indicate how retail sectors that reflect holiday spending performed. However, they would be included in “major reporting sectors” and must have fared well. On a historical note, it is interesting to contemplate how sales tax collections would be performing now if the law had not been changed years ago to require internet sellers to collect the tax. A breakdown of sales tax from brick and mortar stores vs. internet sellers would be informative of investment in the local economy and a trend might be helpful as economists consider the state’s retailing future.
Corporate income tax decreased by $20.8 million but exceeded forecast by $37.9 million. It is understood that corporate income tax collections are volatile and difficult to forecast monthly because of corporate tax planning and regulatory requirements. In this case, there was likely some large payment variance in December last year that DFA considered when building the forecast.
The State’s revenue collections continue to reflect sound economic growth this fiscal year. This should make it easier for leaders to plan for the upcoming fiscal session. As they plan for the future, the economic outlook will play a large role in their deliberations. The ability to fund a budget or tax reductions includes a mix of factors in addition to the economy. The accuracy of the revenue forecast of tax collections is critical. Controlling state expenditures with the budget and determining the impact of tax changes are also critical factors. The standing of collections after six months this year is testament to prior sound financial decisions. Let’s hope State leaders continue sound financial planning. Let’s also hope the economy continues its current level of health.