Arkansas' general-revenue collections in January dropped by $13.6 million from year-ago figures to $614.4 million and also were $55.6 million -- 8.3 percent -- short of the state's forecast for the month.
Collections fell short of the forecast largely because of individual and corporate income tax collections, officials of the state Department of Finance and Administration said Thursday in releasing the monthly revenue report.
"The revenues for January are obviously disappointing," finance department Director Larry Walther told the Legislature's Joint Budget Committee.
But "we're optimistic about what is going to happen ... in the next five months, and we are going to see some change positively back toward the [general-revenue forecast] budget in February," he said.
The report was released a day after Gov. Asa Hutchinson signed into law a bill to cut individual income tax rates for Arkansans with incomes below $21,000 in the tax year starting Jan. 1, 2019. The cut is projected to reduce general revenue by $25.25 million in fiscal 2019, which starts July 1, 2018, and $50.5 million a year thereafter.
"It was awkward," a Joint Budget Committee co-chairman, Sen. Larry Teague, D-Nashville, said about the release of the revenue report a day after Hutchinson signed the tax cut.
Hutchinson said January's revenue report "is exactly the reason that I wanted to make sure that our tax cut was responsible and on the conservative side, and recognizing there could be ups and downs on the revenue stream."
He said, "We feel comfortable that on the individual income tax collections that was down this month [and] that is a timing issue that should be made up in February.
"The greater concern is on the corporate and sales-tax collections ... over the last seven months, and that's the pattern we are watching. But that's a much smaller and defined number that there is a potential that would have to be adjusted," Hutchinson told reporters in his office.
He said he plans to give guidance to directors of state agencies "that may be impacted down the road in the event there is an adjustment of the budget to have contingency plans.
"We're not adjusting the budget today. We want us to have another month of experience at least, but I do want to take this step to have contingency plans in the event this pattern continues and there is a problem next month or the following month," Hutchinson said. "I don't want to wait until the last minute to have the agency directors to start preparing in the event there is a reduction in Category B funding" in the Revenue Stabilization Act for fiscal 2017.
The act categorizes spending, with the most important needs in Category A. Category B funding won't be released to state programs until June 1, the governor noted.
The overall state budget is more than $5 billion. Category B has a total allocation of $127.9 million, including a Medicaid allocation of $88 million; $23.7 million for public schools at the level recommended by Joint Adequacy Evaluation Oversight Subcommittee; and $5.2 million for the merit adjustment fund to help cover ongoing costs of a 1 percent cost-of-living increase awarded to state employees in fiscal 2016, said Kevin Anderson, assistant director of fiscal services for the Bureau of Legislative Research.
Category B also includes $4 million for the Department of Correction to replace previous one-time funding and for the Bowie County Detention Facility; $3.5 million for the Department of Human Services' Behavioral Services Division; $2 million for Department of Higher Education grants to supplement workforce initiative grants; and $1.5 million for the Arkansas Economic Development Commission to increase marketing and open an office in Germany, Anderson said.
Through the first seven months of fiscal 2017, the state's total general-revenue collections have increased by $17.3 million. or 0.5 percent, over the same period in fiscal 2016 to $3.65 billion, but they're $70.3 million, or 1.9 percent, below the state's forecast, the finance department reported.
In fiscal 2017, both individual income and sales- and use-tax collections have increased over the previous fiscal year, and corporate income tax collections have declined, but the collections for each are below forecast.
Tax refunds and some special governmental expenses come off the top of total general revenue, leaving a net amount that state agencies are allowed to spend.
So far in fiscal 2017, net general revenue has increase by $22.3 million, or 0.7 percent, over the same period in fiscal 2016 to $3.16 billion, but that's $57.1 million, or 1.8 percent below the state's forecast.
Last year, the Legislature and Hutchinson enacted a $5.33 billion budget that factored in nearly $101 million in reduced individual income tax collections in regard to Hutchinson's plan to reduce rates for Arkansans with taxable income between $21,000 and $75,000.
"With regard to the forecast for 2017, we still have five more months to go. We are going into the income tax period where individual income taxes are being filed for calendar year 2016," Walther said.
"I don't feel it's time right now to make any adjustment in the 2017 fiscal year forecast. We'd like to see February and March [tax collections] before we make a determination there," he said.
Sen. Uvalde Lindsey, D-Fayetteville, questioned whether the state has gone too far in cutting individual income taxes.
"We have adequately provided for the tax cut from the 2015 session," said John Shelnutt, the state's chief economic forecaster.
According to the finance department, January's general revenue totaling $614.4 million included:
• A $4.5 million, or 1.3 percent, increase in individual income tax collections over a year ago to $358.7 million, which fell $26.8 million, or 6.9 percent, behind the state's forecast.
Withholdings are the largest source of individual income taxes. They increased by $4.9 million over a year ago to $257.8 million, but fell $20.5 million short of forecast.
"There was an anomaly between January and February," Walther said.
The department expected more growth in withholdings from more paydays for the month than a year ago, and "the lack of this payday gain because of early-holiday related payrolls a year ago caused the shortfall and will shift a gain against forecast to February results," the report said.
Walther said, "We believe that February will offset what happened in January, so it will sort of equalize the individual income tax."
• A $2.9 million, or 1.5 percent, increase in sales- and use-tax collections over a year ago to $200.5 million, which lagged behind the state's forecast by $6 million, or 2.9 percent.
"We believe sales tax are going to be stable going forward," Walther said.
Shelnutt said, "In sales tax, we were below forecast earlier in the fiscal year, and I think we are coming back out of that.
"It's a blend of a lot different stories in sales tax, and we would hope to see some convergence of business spending and consumers [spending] toward the end of the fiscal year," he said.
Shelnutt said state officials don't have access to information to gauge the impact of online sales that aren't taxed.
"It's probably cutting into it, but when you look at the retail component of sales-tax sector by sector analysis, it's not that far off forecast," he said.
• A $17.2 million, or 43.2 percent, decrease in corporate income tax collections from the year-ago figure to $22.6 million, which was $19.4 million, or 46.2%, below the state's forecast.
Corporate income taxes are a volatile source of taxes, Walther said.
"What we think has happened here is a lot of corporations will file estimated taxes, and to the extent they have overestimated and [are] still getting a refund, they will use those as credits going forward. We are seeing some of that occurring in January and this year actually," Walther said.
January's general revenue fell short of the $628 million record for January in 2016, said Whitney McLaughlin, a tax analyst for the finance department.
During the budget committee meeting, Sen. Bill Sample, R-Hot Springs, said, "Since there's not going to be any money for general improvement [fund projects], is there going to be any money for highways?"
Walther said Hutchinson's highway plan relies on using $20 million in interest earnings from the state treasurer's office for fiscal 2018, but "another portion has to do with the surplus and [using 25 percent] of that surplus.
"To the extent, the surplus is less than $100 million, it would reduce the amount that would go the highways," Walther said. Hutchinson's plan also relies on the reallocation of $8.5 million in state funds to highways in fiscal 2018.
Sample said, "We have promised that we would make sure that the Highway [and Transportation] Department had $50 million so they could recapture $200 million [in federal highway funds] that we send up there as taxpayers buying gasoline in taxes. Are we going to be able to cover that?"
Walther said, "I don't think it is a guarantee. I think we need to work towards that."
Sen. Bart Hester, R-Cave Springs, said the Highway Department has $1 billion-plus budget, so for the department, $50 million "is not like someone is going to miss Christmas dinner.
"But if anyone wants to fund it and make it a priority, I have plenty of ideas where we can cut to make up that money," he said.
Hutchinson told reporters, "There are some funds that could be tapped for [highway funding] whether it is rainy-day [funds] or otherwise. It's a little bit early to make these decisions."
Another Joint Budget Committee co-chairman, Rep. Lane Jean, R-Magnolia, said in an interview, "I believe somewhere between $50 million and $70 million" in surplus at the end of fiscal 2017 is do-able.
Hutchinson has proposed a $5.48 billion general-revenue budget for fiscal 2018 -- a $153 million increase over fiscal 2017 with most of the increase for the Department of Human Services.
"We believe that we have conservatively forecasted for [fiscal 2018 and fiscal 2019]," Walther said. "We feel like there is not requirement, no need, to make any adjustments with fiscal year 2018 and fiscal year 2019 forecasted revenues at this point in time."
Hester said Hutchinson has proposed a $3 million increase for pre-kindergarten funding in fiscal 2018, and a $10 million increase for the state's higher-education institutions in fiscal 2019.
"Those are good things. But if you can't afford them, you can't afford them," he said. "Now, it's going to force us to make the tough decisions. As Republicans, we run on less government and fiscal responsibility. It's time for us to find some of those efficiencies that we talk about when we campaign."
A Section on 02/03/2017