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In wake of record general revenue surplus of $1.63B for fiscal 2022, Hutchinson plans to call a special session to cut taxes

by Michael R. Wickline | July 6, 2022 at 7:18 a.m.
In this file photo Gov. Asa Hutchinson speaks at the Arkansas Rural Economic Development Conference at the Hot Springs Convention Center.

Arkansas Gov. Asa Hutchinson said Tuesday he intends to call a special session of the General Assembly to cut taxes during the second week of August, after state officials reported that state government accumulated a record general revenue surplus of $1.628 billion in fiscal 2022 that ended Thursday.

The state's largest previous general revenue surplus totaled $945.7 million in fiscal 2021 that ended June 30, 2021. Before that, the state's largest general revenue surplus was $409.3 million in fiscal 2007.

Hutchinson said the state's net general revenue collections in June beat the state's forecast by more than $150 million, leaving a net surplus in excess of $1.6 billion in fiscal 2022.

"This represents the largest surplus in Arkansas history and demonstrates the state is collecting too much in tax revenue," the Republican governor said in a news release.

"Our collections are above last year, despite the tax reductions enacted last year," Hutchinson said.

"This growth is attributable to the state's dynamic job creation coming out of the pandemic and increased consumer buying power."

Hutchinson said there is a consensus with legislative leaders on tax relief strategy.

The specific items on the call for the special session that he intends for the week of Aug. 8, in addition to tax relief, will be announced at a later time as he holds further discussions with state lawmakers, he said.

During the past three months, the governor has repeatedly brought up the possibility of calling a special session to provide more tax relief to Arkansans struggling with inflation, including the rising costs of food and gasoline.

About a month ago, the governor added public school safety and security and teacher pay raises to the list of potential items for a possible special session.

The state collected a general revenue surplus of $1.628 billion in fiscal 2022 that resulted from the tax year 2021 individual and corporate income tax liability paid in fiscal 2022 that was much higher than expected in Arkansas and other states, said John Shelnutt, the state's chief economic forecaster.

In addition, the state's economic expansion exceeded expectations, and state officials initially projected a deceleration from a federal stimulus-fueled economy that didn't happen, he said.

In fiscal 2022, the state's general revenue collections were $8.77 billion, an increase of $652.1 million or 8% above collections in fiscal 2021, the state Department of Finance and Administration reported Tuesday in its monthly general revenue report. The state's two largest sources of general revenue are individual income taxes and sales and use taxes.

Tax refunds and some special government expenditures are taken off the top of total general revenue collections, leaving a net amount that state agencies are allowed to spend up to the maximum authorized by the state's Revenue Stabilization Act. The act distributes state general revenues to state-supported programs such as the public schools, the state's colleges and universities, human service programs, and prisons and other corrections programs.

In fiscal 2022, the state's net general revenue totaled $7.47 billion, an increase of $632.1 million or 9.2% over fiscal 2021 figures, according to the finance department.

That's $1.628 billion in excess of the full funding level for the Revenue Stabilization Act and represents the surplus, the finance department said. In the 2021 regular session, the Legislature and governor enacted a Revenue Stabilization Act to distribute $5.84 billion in fiscal 2022 to state-supported programs.

In the fiscal session earlier this year, the Legislature and the governor enacted a Revenue Stabilization Act that would distribute $6.02 billion to state-supported programs in fiscal 2023 that started Friday and ends June 30, 2023.

The finance department currently projects a $914 million general revenue surplus at the end of fiscal 2023.

USE OF SURPLUS

Hardin said $1.378 billion of the $1.628 billion general revenue surplus in fiscal 2022 has been transferred to the general-revenue allotment reserve fund.

The other $250 million of the general revenue surplus was distributed to other funds as authorized by the governor and the Legislature, he said.

Hardin said $150 million was transferred to a restricted reserve fund for various improvements and projects, including a proposed prison expansion, that require a majority vote of the Legislative Council to fund, $50 million to the law enforcement officers' stipend grant fund, and $50 million to the state highway and transportation fund to match federal highway funds.

Senate President Pro Tempore Jimmy Hickey, R-Texarkana, and House Speaker Matthew Shepherd, R-El Dorado, said Tuesday night there is a general consensus with Hutchinson to accelerate the implementation of individual and corporate income tax cuts enacted in the December special session, provide temporary low-income tax relief, and adopt the latest federal Section 179 depreciation schedule for businesses in the special session expected to be called in the second week of August.

Last month, Hutchinson signaled his support for accelerating the implementation of cutting the state's top individual income tax rate from 5.5% to 4.9%, retroactive to Jan. 1, 2022, based on the state's general revenue tax collections, projected surpluses and projections for future general revenue collections. This spring, Sen. Jonathan Dismang, R-Searcy, initially floated that idea, and House Revenue and Taxation Committee Chairman Joe Jett, R-Success, quickly endorsed it.

The rate cut is part of the individual and corporate income tax rate cut package enacted in the Dec. 7-9 special legislative session. Supporters of the tax cut package said it would make the state's income tax rates more competitive with other states, while critics said the primary beneficiaries would be high-income earners.

The state's top individual income tax rate is scheduled to be cut to 5.3% on Jan. 1, 2023, to 5.1% on Jan. 1, 2024, and to 4.9% on Jan. 1, 2025, under current state law.

The state Department of Finance and Administration projects that accelerating the implementation of cutting the state's top individual income tax rate to 4.9%, retroactive to Jan. 1, 2022, would reduce state general revenue by $295.9 million in fiscal 2023, $114 million more in fiscal 2024 and $39.15 million more in fiscal 2025 to provide tax relief totaling $449 million.

The temporary low-income income tax relief proposal would reduce the income tax bracket on income ranges from $5,100 to $10,299 from a 2% tax rate to 0% for those with net income of less than or equal to $87,000 for tax year 2022, according to Hardin.The finance department projects it would reduce state general revenue by $90 million in fiscal 2023.

Arkansas' top corporate income tax rate of 6.2% dropped to 5.9% on Jan. 1, 2022. The rate is scheduled to drop to 5.7% on Jan. 1, 2023, to 5.5% on Jan. 1, 2024, and to 5.3% on Jan. 1, 2025, under state law.

The proposal to accelerate the reduction in the state's top corporate income tax rate to 5.3% on Jan. 1, 2023, is projected by the finance department to reduce state general revenue by $18.5 million in fiscal 2023, $27.8 million more in fiscal 2024, and $9.2 million more in fiscal 2025.

The finance department projects adopting the 2022 federal Section 179 depreciation schedule would reduce state general revenues by $29.4 million in fiscal 2023, $24.8 million more in fiscal 2024, $21.1 million more in fiscal 2025, $18.4 million more in fiscal 2026 and $8.4 million more in fiscal 2027.

The federal Section 179 depreciation schedule allows businesses to deduct the entire purchase price of new or used equipment up to $1.08 million in 2022 rather than capitalizing and depreciating the asset over the designated useful life of the asset, according to Hardin. The $1.08 million deduction is reduced dollar for dollar if asset purchases exceed $2.7 million for 2022, he said.

Arkansas previously adopted Section 179 as it existed on Jan. 1, 2009, and the dollar limitation on the deduction is $25,000 and the dollar-for-dollar phase-out starts at $200,000, he said. The federal limitation is adjusted for inflation each year, he said.

Asked about prospects for a recession next year, Hutchinson said Tuesday that "the possibility of a recession is the reason we have put over $1.2 billion into a reserve fund and the ongoing surplus allows us to increase the reserve even more.

"There is the potential for a recession and that increases the need for tax relief," he said.

The state's catastrophic reserve fund totals $1.21 billion, Hardin said.

About a month ago, Hutchinson initially proposed raising teacher salaries to a minimum of $46,000 and implementing at least a $4,000 salary increase with a projected cost of more than $300 million a year. Under Act 170 of 2019, the minimum teacher salary is $34,900 in the 2021-2022 school year and will increase to $36,000 in the 2022-2023 school year.

Then, Hutchinson revised his proposal to increase the minimum teacher salary to $42,000 a year and provide a $4,000 increase to every teacher for the 2022-2023 school year. That would eventually cost about $200 million a year.

Senate Democratic leader Keith Ingram of West Memphis said Tuesday that he's worried there isn't a solid consensus behind Hutchinson's needed plan to boost teacher salaries, adding the Senate Democratic Caucus supports teacher pay raises.

But Dismang, who is a co-chair of the Joint Budget Committee, said Tuesday that "we are in the middle" of the House and Senate Education Committees' educational adequacy review, and the report's recommendations will be considered in the 2023 regular session, starting in January.

Lane Jean, R-Magnolia, who also is a co-chair of the Joint Budget Committee, said he expects a significant raise for teachers will be recommended in the educational adequacy report this fall. That needs to be done "in a well-thought-out manner rather than trying to do something real quick," he said.

School districts also are having a tough time filling positions such as school bus drivers and custodians, and face increased fuel costs, and potentially increased school safety costs, he said.

JUNE

Last month's general revenue collection of $903.2 million exceeded the record for the month.

The previous high was the $867.7 million collected in June 2021, said Whitney McLaughlin, a tax analyst for the state Department of Finance and Administration.

The general revenue collections in June, which increased by $35.5 million or 4.1% over the same month a year ago to $903.2 million, exceeded the state's May 18 forecast by $149.5 million or 19.8%.

The state's net general revenues in June increased by $38.4 million or 5.2% over year-ago figures to $779 million and beat the state's forecast by $150.1 million or 23.9%.

Larry Walther, secretary of the finance department, said Tuesday in a written statement that June's general revenues were notably above forecast because of the continued strength in the state economy, with individual income tax estimated payments still running above expectations.

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

• A $10 million or 3% increase in individual income tax collections over a year ago to $338.7 million, which outdistanced the state's forecast by $32.9 million or 10.8%.

Withholding is the largest category of individual income taxes. These collections increased by $3.4 million over a year ago to $218.1 million, which fell $1.1 million short of the forecast. The withholding increased by 1.6% over a year ago, reflecting continued growth in payroll earnings offset by the effects of income tax cuts.

Collections from estimated payments increased by $19.9 million over a year ago to $103 million, which beat the state's forecast by $30 million.

Collections from returns and extensions declined by $13.3 million from a year ago to $17.6 million, which outdistanced the state's forecast by $4 million.

• A $29.1 million or 11.3% increase in sales and use tax collections from a year ago to $285.9 million, which exceeded the state's forecast by $40.8 million or 16.7 %.

Sales tax collections from motor vehicles sales declined by 8.2% from a year ago, largely from adverse comparison with stimulus spending and pent-up demand in June of last year.

• An $18.5 million or 16.1% increase in corporate income tax collections over a year ago to $133.5 million, which beat the state's forecast by $53.3 million.

Print Headline: Hutchinson plans tax session

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