The Arkansas Department of Finance and Administration this week increased its general revenue forecasts for the next four fiscal years and is now projecting a $1.47 billion surplus in the current fiscal year that ends June 30, and a $914 million surplus in the next fiscal year that starts July 1 and ends June 30, 2023.
In its last forecast Dec. 16, the finance department projected a $264.4 million general revenue surplus for fiscal 2022 that ends June 30. A month ago, Gov. Asa Hutchinson said state officials were projecting a $1 billion surplus in fiscal 2022. For fiscal 2022, the state's general revenue budget is $5.84 billion.
In its Dec. 16 forecast, the department didn't project a general revenue surplus for fiscal 2023 that begins July 1 because the Arkansas General Assembly hadn't enacted a general revenue budget for fiscal 2023 yet, state officials said. In this year's fiscal session, the General Assembly enacted a $6.02 billion general revenue budget for fiscal 2023.
In fiscal 2021 that ended June 30, the state's general revenue surplus totaled $45.7 million, a record for a fiscal year based on the state's records for the past 30 years.
The state's two largest sources of general revenue are the state's individual income taxes and sales and use taxes.
"Due to better than expected economic expansion, the revenue forecast was increased for this fiscal year along with following years," Arkansas Department of Finance and Administration Secretary Larry Walther said Thursday in a written statement.
"Although we anticipate greater revenue collection, the forecast remains conservative due to factors such as rising interest rates, the war in Ukraine and the impact of supply chain issues on production and inflation," Walther said. "We expect economic growth will return to a more normal rate over the next few years from the record highs we are currently experiencing. As a result, we must be careful to avoid inflated revenue forecasts."
Hutchinson said Thursday that inflation, including the high cost of fuel, has hurt Arkansans and some form of tax relief is necessary to return a portion of the surplus to taxpayers.
"I will continue to discuss options to accomplish this with legislators and a special session will be necessary at some point to deal with the surplus," the Republican governor said Thursday in a written statement.
INCOME TAX CUTS
Asked about the idea about accelerating the implementation of the state's individual income tax cuts, enacted in the Dec. 7-9 special session, and the state adopting the federal depreciation schedule for small businesses and farmers, Hutchinson on Thursday stopped short of expressing his opinion on that idea.
State officials said $250 million of the fiscal 2022 surplus already has been obligated by the Legislature and the governor. They said $50 million is set aside for state highway funding to match federal highway funds; $50 million is set aside for stipends to law enforcement officers; and $150 million is allotted for the restricted reserve fund for various improvements and projects, including a proposed prison expansion.
Two and a half weeks ago, state Sen. Jonathan Dismang, R-Searcy, floated the idea of accelerating the complete implementation of the state's individual income tax cuts, enacted in the December special session, retroactive to Jan. 1, 2022. At that time, House Revenue and Taxation Committee Chairman Joe Jett, R-Success, said he agreed with accelerating the implementation of the individual income tax cuts.
Accelerating the implementation of the income tax cuts would trigger a change in the withholding tables and immediately allow taxpayers to keep more of their paycheck, said Dismang, who is a co-chairman of the Joint Budget Committee and vice chairman of the Senate Revenue and Taxation Committee.
The individual income tax and corporate income tax cuts -- enacted in the December special session -- are projected by the finance department to reduce state general revenue by $132.5 million in fiscal 2022, then gradually increase from $307.4 million in fiscal 2023 to $497.7 million in fiscal 2026. Some of the future individual and corporate income tax rate cuts are contingent on the state not tapping the state's $1.2 billion catastrophic reserve fund during certain periods under the tax cut laws enacted in the December special session.
Proponents of the income tax cuts said they would make Arkansas' tax code more competitive with other states, while opponents said they mostly benefit higher-income Arkansans.
Dismang and Jett also have signaled they would like the state to adopt the federal depreciation schedules for small businesses and farmers in a special session.
Dismang said he is not comfortable with the state sending out tax rebate checks financed with a portion of the general revenue surplus in the mail to taxpayers, and would rather provide temporary tax relief to taxpayers in the state's low-income tax tables.
Rep. Lane Jean, R-Magnolia, said he favors the state adopting the federal depreciation schedule for small businesses and farmers, and providing "some type of [tax] refund."
But he said he prefers holding off on making a decision on whether to accelerate the implementation of the state's individual income tax cuts enacted in the December special session.
"I think looking at this for another year wouldn't hurt and see what our economy is going to look like," said Jean, who is a co-chairman of the Joint Budget Committee and serves on the House Revenue and Taxation Committee.
"There is a lot of volatility out there," he said. "Watch the stock market."
At least a few lawmakers have said they would prefer Hutchinson not to call a special session this year because they would rather consider granting tax cuts in the 2023 regular session. Hutchinson's successor as governor will take office in January.
Besides providing some tax relief with part of the surplus, Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said Thursday he would like to boost the state's catastrophic reserve fund from about $1.2 billion to $2 billion.
In a letter dated Wednesday about the general revenue forecast revisions to Legislative Council Co-Chairs Sen. Terry Rice, R-Waldron and Rep. Jeff Wardlaw, R-Hermitage, Walther said the short-term outlook for Arkansas' economy indicates elevated growth rates for another year in fiscal year 2023, trending back toward pre-pandemic growth averages by fiscal year 2024.
"Real disposable income growth will remain above pre-pandemic average of 2.5 % through [fiscal year] 2025, but with slow deceleration over the forecast period," he wrote.
PESSIMISTIC SCENARIO
The pessimistic case, with a 35% probability, involves weak consumer spending in response to largely unconstrained prices, an uncertain speed of response in interest rates, and flat gross domestic product growth in the first half of fiscal year 2023, Walther said.
"Consumption measures would be expected to turn negative in the second half of 2022 without significant rebound in early 2023 while construction and other investment indicators trend down significantly,"under this pessimistic case, he wrote.
The optimistic case, with a 15% probability, is tied to a more hopeful outcome for the Russia-Ukraine conflict with more stimulus and largely resolved supply-chain issues, Walther said.
The finance department will act expeditiously to adjust the general revenue forecast and budgets if conditions warrant, he said.
"We have provided a conservative revenue forecast recognizing the growth opportunities and risk profile," Walther wrote in his letter to Rice and Wardlaw.
Tax refunds and some special government expenditures are taken off the top of gross general revenue collections, leaving a net amount that state agencies are allowed to spend up to their maximum distribution under the Revenue Stabilization Act, which distributes general revenue to state-supported programs such as the public schools, human service programs, colleges and universities and prisons.
For fiscal year 2022, the finance department now forecasts gross general revenue totaling $8.617 billion and net general revenue of $7.322 billion, including a $1.473 billion surplus. The revised forecast increased the projection for gross general revenue by $1.27 billion and for net general revenue by $1.2 billion, said John Shelnutt, the state's chief economic forecaster.
For fiscal year 2023, the department now projects gross general revenue totaling $8.325 billion and net general revenue of $6.938 billion, including a $914 million surplus. The revised forecast increased the projection for gross general revenue by $794 million and for net general revenue by $720 million, Shelnutt said.
Fiscal year 2024 begins July 1, 2023, and ends June 30, 2024.
For fiscal year 2024, the department forecasts gross general revenue totaling $8.074 billion and net general revenue of $6.652 billion. The revised forecast increased the projection for gross general revenue by $370 million and for net general revenue by $308 million, Shelnutt said.
Fiscal year 2025 begins July 1, 2024, and ends June 30, 2025.
For fiscal year 2025, the department now projects gross general revenue totaling $8.324 billion and net general revenue of $6.846 billion. The revised forecast increased the projection for gross general revenue by $318 million and for net general revenue by $263 million, Shelnutt said.
Various candidates for state elected offices have called for eliminating or phasing out the state's individual income tax.
In fiscal 2025, the department forecasts individual income tax collections of $3.892 billion, sales and use tax collections of $3.222 billion and corporate income tax collections of $502.9 million.