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Arkansas' tax revenue soars 70.8% in May

Despite covid fears, state on track for record surplus by Michael R. Wickline | June 3, 2021 at 7:11 a.m.
FILE — The state Capitol is shown in this file photo.

Thanks to a rebounding economy and federal stimulus payments, Arkansas' general revenue tax collection in May hit $822.8 million, an increase of $341 million -- or 70.8% -- over what came in during the same month a year ago, and beat projections set amid fears of the pandemic's impact.

With one month to go in fiscal 2021, the state's general revenue surplus is a record, just shy of $1 billion. Last month's general revenue take alone beat the state's forecast by $327.8 million.

Changes in the deadline for filing and paying the state individual income tax accounted for part of the large increase, the finance department said Wednesday in its monthly revenue report.

In 2020, the state shifted the individual income tax filing and payment deadline from April 15 until July 15. This year, the state shifted that deadline from April 15 until May 17. Both changes mirrored the federal government's changes in the deadline. The changes were made because of the covid-19 pandemic.

The state's monthly general revenue tax collections have exceeded the state's fiscal 2021 forecast, set on April 2, 2020, because that forecast anticipated a recession in Arkansas spawned by the pandemic.

Gov. Asa Hutchinson said Wednesday that the state's revenue report for May is an overall indicator of a healthy, growing economy.

"This includes people returning to work and spending money through the state, representing confidence in our economy," the Republican governor said in a written statement.

"These factors, combined with the positive impact of [federal coronavirus] stimulus payments, place the state in a record setting financial position entering the final month of the fiscal year."

The May total was a record for the month, but fell short of the state's record for collections in any month.

The previous record for the month of May was $496.2 million collected in 2019, while the record for any month is $958.8 million collected in April 2019, said Whitney McLaughlin, a tax analyst for the state Department of Finance and Administration.

NET REVENUE

Tax refunds and some special government expenditures are taken off the top of general revenue, leaving a net amount that state agencies are allowed to spend.

In May, net general revenue increased by $289.3 million, or 79.1%, over the same month a year ago to $655.2 million, exceeding the forecast by $263.2 million, or 67.1%.

During the first 11 months of fiscal 2021, net general revenue increased by $941 million, or 18.2%, over the same period in fiscal 2020 to $6.1 billion and beat the forecast by $980 million, or 19.1%. The results include net collection increases tied to the 2020 and 2021 income tax due dates falling in fiscal 2021, the finance department said.

Hutchinson said Wednesday the $980 million surplus accumulated so far in fiscal 2021 is the largest surplus in the history of Arkansas.

"My expectation is that we will have a surplus in excess of $1 billion by June 30, which is another state record," he said.

The state's previous record surplus totaled $409.2 million at the close of fiscal 2007, said Scott Hardin, a spokesman for the finance department.

Hutchinson said the surplus accumulated so far in fiscal 2021 "underscores the importance of the belt-tightening decisions we made during the pandemic and the strength of our economic recovery."

"The record surplus also tells us that this fall will be the right time to cut our individual income tax rate again," he said in a written statement. "This surplus has been created despite reducing our tax rate this year to 5.9%. This shows we can fund education, raise teacher pay and protect public safety at the same time we are lowering our tax rate. It is all because our private sector continues to grow."

In its fiscal session in April 2020, the Arkansas General Assembly enacted a $5.89 billion general revenue budget for fiscal 2o21. The April 2, 2020, general revenue forecast anticipated providing $5.68 billion toward that budget, leaving the rest of the budget unfunded.

With net general revenue exceeding that forecast by $980 million so far, at least part of the unfunded budget in fiscal 2021 is expected to be covered.

State-supported programs that are authorized to carry forward funding, such as the state Department of Education and the state's higher education institutions, will be funded to the full amount listed under the Revenue Stabilization Act for fiscal 2021 if the money is available via the surplus, Hardin said.

In this year's regular session, the General Assembly enacted a Revenue Stabilization Act that will distribute $5.84 billion in general revenue in fiscal 2022 to state-supported programs. Most of the increase over fiscal 2021's budget will go to human services, public schools, colleges and universities and correctional programs.

The fiscal 2022 budget is based on an estimated net general revenue of $6.06 billion before the Legislature's tax cut measures collectively reduced projected net revenue by $203.1 million, according to legislative records. The budget projects a $17 million surplus in fiscal 2022.

The tax cuts include $179 million from Act 248, which provides covid-19 relief program tax deductions and loan forgiveness; and $3.1 million from Act 254, which exempted unemployment benefits from income taxes, according to the finance department.

Hutchinson recently said he wants to reduce the top individual income tax rate from 5.9% to 5.5% over two years and he wants to reach a consensus with lawmakers on an income tax cut plan to consider before calling a special session in the fall.

Under a proposal drafted by the finance department, the top rate would drop to 5.7% on Jan. 1 and then to 5.5% on Jan. 1, 2023, and would include an adjustment for what is called a tax table cliff for the lower- to middle-income tax table. The proposal is projected by the finance department to reduce general revenue by about $30 million in fiscal 2022; by about $57 million more in fiscal 2023; and about another $27 million more in fiscal 2024.

Rep. Lane Jean, R-Magnolia, said May's revenue report "strengthen[s] the governor's position" on income tax cuts.

"I think we have an opportunity to put even more money in the long-term reserve," said Jean, who is a co-chairman of the Joint Budget Committee. In late April, state officials had estimated the state's long-term reserve fund, which has a balance of $209.9 million, could increase to $711 million with the help of surplus funds.

Asked about the governor's proposed income tax cut, Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said he plans to consult with senators about their tax-cutting ideas first because he believes senators want to cut income tax rates, but he wants to find out how they want to do that.

House Democratic leader Tippi McCullough of Little Rock said the state has serious deficiencies in both education and health care that should be funded and, if the state cuts taxes, should lower income taxes for the working class and the lower-income people instead of upper-income people who are not suffering.

MAY REVENUE

According to the finance department, the state's general revenue in May included:

• A $236.3 million, or 100.4%, increase in individual income tax collections over a year ago to $471.7 million, reflecting the change in the filing and payment due date from April 15 until May 17.

These collections beat the forecast by $247.4 million, or 110.3%, but the forecast was not updated for the deadline shift.

Individual income tax withholdings are the largest category of individual income tax collections.

Withholdings totaled $243.1 million last month -- a $36.8 million increase over the same month a year ago -- and exceeded the forecast by $36.3 million. These collections reflected in part an extra Friday payday compared with a year ago and economic growth with more people working and more people working longer hours.

Collections from individual income tax returns and extensions totaled $213.4 million last month -- a $193.5 million increase over a year ago -- and beat the forecast by $199.6 million.

Collections from estimated payments totaled $15.3 million last month -- a $6 million increase over a year ago -- and exceeded the forecast by $11.6 million.

• A $68.5 million, or 33.3%, increase in sales and use tax collections over the same month a year ago to $274.2 million. The collections exceeded the forecast by $49.8 million, or 22.2%.

The sales tax growth in May "reflects greater reopening of the economy and pent up demand with stimulus," said John Shelnutt, the state's chief economic forecaster.

"Most of the sales [tax collected in May] represents economic activity in April and reported in May [ with] motor vehicle sales being the one exception that kind of hit a crossover," he said. Many people received $1,400 federal stimulus payments in March.

The state's retail sales tax collections in May increased by $32.5 million, or 37.7%, over the $86.2 million collected a year ago, Shelnutt said.

Sales tax collections from restaurants in May increased by $10 million, or 70%, over $14.3 million collected a year ago, while sales tax collections from motor vehicle sales increased by $7.5 million, or 26%, over the $29 million collected a year ago.

• A $25.6 million, or 169.3%, increase in corporate income taxes over the same month a year ago to $40.6 million, beating the forecast by $22 million, or 118.5%.

"Corporation income tax collections from large accounts continue to exceed expectations," Shelnutt said. "We had a pretty conservative forecast ... in that category year by year because it is so volatile and has been a problem in the past, but it is doing well during the pandemic."

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