The Arkansas Department of Finance and Administration is now projecting a $1.035 billion general revenue surplus at the end of fiscal 2023 on June 30 -- up from its Nov. 10 projection for a $598.1 million general revenue surplus.
The finance department also is forecasting a $423.3 million general revenue surplus at the end of fiscal 2024, which begins July 1, 2023, and ends June 30, 2024.
The projections are in the finance department's revised general revenue forecast dated Wednesday for fiscal 2023, 2024 and 2025 and anticipate fully funding the state's $6.02 billion general revenue budget in fiscal 2023 and the state's $6.2 billion general revenue budget in fiscal 2024. The state's general revenue budget finances state-supported programs such as the public schools, human service programs, colleges and universities and prisons.
The finance department's projections factor in the income tax cuts enacted during this year's regular session that adjourned May 1, the state's chief economic forecaster John Shelnutt told the Legislative Council on Friday.
"Year to year, we are coming down off of very high growth rates [in general revenue collections] in recent years," he said. "We still have disinflation taking place, but the labor markets are quite strong so we have some offsetting forces there.
"But in general, we still see [fiscal year] 2024 as a transition year ... showing negative numbers from year to year from 2023 down to 2024 and then lift off to normal growth in [fiscal year] 2025," Shelnutt said.
State Rep. Fran Cavenaugh, R-Walnut Ridge, said she's heard several economists forecast a recession later this calendar year, so she asked Shelnutt whether the finance department has factored in a full-blown recession into its projections.
"We don't identify it as a full-blown recession in this forecast," Shelnutt said.
"It's certainly close, and it is certainly below average growth," he said.
"In recent quarters, consumers have not been playing the part of falling into a recession, so they have been offsetting other components of [gross domestic product], and until we see all of the major components align turning down, we are not going to see that outcome," Shelnutt said.
"But we do see consumer contributions slowing down to growth," he said.
Cavenaugh questioned whether Shelnutt is afraid that a recession will hit the state later this calendar year.
Shelnutt responded, "Not with the labor market that we are seeing now, and consumers are still going to be bolstered by that strong labor market situation."
Sen. Bryan King, R-Green Forest, questioned whether the finance department's projections for state general revenue collections are too high as he said they were in the 2008 and 2009 recession.
In response, Shelnutt said "there clearly are cracks in the system.
"There are some concerns out there, but they are not on the scale of a financial crisis," he said.
Shelnutt said he is not aware of "any major overhangs in the financial system," though "maybe we are not getting the full story on the banking situation.
"But it looks like it's containable," he said.
King said that "when it comes to the banking situation, if there is one thing they are going to say about that, they are going to lie.
"They are not going to go out and tell people the banks are in trouble because then you have a rush on the banks," he said.
King said "these are more than cracks."
"I am a little troubled by the word 'cracks' in the system," he said. "These are real issues."
LINGERING PAIN
Shelnutt said there are problems at the household level, particularly for financing for automobile purchases and some housing purchases.
"That's why the forecast has the pattern of slowing, even after we reach the pause coming up in interest rate-setting by the Federal Reserve," he said. "... That pain is going to linger on for a few years, not just one."
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 their maximum distribution under the state's Revenue Stabilization Act.
The finance department's revised general revenue forecast dated Wednesday projects the state's total general revenue at $8.7 billion in fiscal 2023 -- a $68.5 million or 0.8% drop from fiscal 2022 -- and the state's net general revenue at $7 billion -- a $418.5 million or 5.6% decline from fiscal 2022.
In the 2022 fiscal session, the General Assembly and then-Gov. Asa Hutchinson authorized a $175.1 million increase in the state's general revenue budget to $6.02 billion in fiscal 2023 with most of the increased general revenue allocated to the education and human service programs.
In the Aug 9-11 special session, the General Assembly and Hutchinson enacted a four-pronged tax cut package that the finance department projected would reduce state general revenue by $500.1 million in fiscal 2023, $166.6 million in fiscal 2024, $69.5 million in fiscal 2025, $18.4 million in fiscal 2026 and $8.4 million in fiscal 2027.
The package included the acceleration of a reduction of the state's top individual income tax rate from 5.5% to 4.9%, retroactive to Jan. 1, 2022, and a cut in the state's top individual income tax rate from 5.9% to 5.3%, effective Jan. 1, 2023.
The special session came after the state reported accumulating a record general revenue surplus of $1.628 billion in fiscal 2022 that ended June 30, 2022. In fiscal 2021 that ended June 30, 2021, the state reported collecting a $945.7 million general revenue surplus.
2024 FORECAST
In fiscal year 2024, the finance department's revised general revenue forecast dated Wednesday projects total general revenue at $8.1 billion -- a $569 million or 6.5% decline from fiscal 2023 -- and net general revenue of $6.6 billion, a decrease of $435.5 million or 6.1% from fiscal 2023.
In this year's regular session, the General Assembly and Gov. Sarah Huckabee Sanders authorized a $177.7 million increase in the state's general revenue budget to $6.2 billion in fiscal 204 with most of the increased general revenue allocated to education and human service programs.
The General Assembly and Sanders also enacted a measure that would authorize the transfers of $1.4 billion in unallocated and unobligated state funds, including $1.3 billion in the general revenue allotment serve balance, and up to $380.6 million in surplus funds from fiscal 2023 largely to set-aside accounts in the restricted reserve fund for various projects, including future prison construction and the state's share of public school building costs.
On April 10, Sanders signed into law a bill that cuts the state's top individual income tax rate from 4.9% to 4.7% and the state's top corporate income tax rate from 5.3% to 5.1%, retroactive to Jan. 1, 2023.
Act 532 is projected by the finance department to reduce state general revenue by $186 million in fiscal 2024 and $124 million in fiscal 2025. The department said the projected revenue impact assumes that employee withholding will be adjusted by employers on or after June 1, 2023.
On April 10, Sanders also signed into law a bill that will gradually phase out the "throwback rule" on business income of multistate corporations. Act 485 is projected by the finance department to reduce general revenue by $10.6 million in fiscal 2024 and ultimately reduce general revenue by $74 million a year in fiscal year 2030 and thereafter.
In fiscal 2025, the finance department's revised general revenue forecast dated Wednesday projects total general revenue of $8.3 billion -- an increase of $189.9 million or 2.3% from fiscal year 2024 -- and net general revenue at $6.8 billion -- an increase of $217 million or 3.3% from fiscal year 2024.
In response to a question from Sen. Kim Hammer, R-Benton, about the projection for fiscal year 2025, Shelnutt said he expects growth of about 3% in fiscal year 2025, which is similar to the state's long-run average growth, and that includes somewhat elevated inflation of about 2.5%. The long-run average for inflation is closer to 2%.
"We do take a cautious approach with corporate income tax," Shelnutt said. "After 2½ years of extraordinary growth in corporate income tax, we are assuming it comes back down to a normal level. That's a very volatile component, and we are very conservative in handling that part of the forecast."
He said he expects growth of sales tax collections of about 2%.
In fiscal 2025, the finance department projects $3.7 billion in individual income tax collections, $3.4 billion in sales and use tax collections and $507 million in corporate income tax collections. For fiscal 2025, the department forecasts $522.3 million in individual income tax refunds and $70.5 million in corporate income tax refunds.
Sanders has repeatedly said she wants to responsibly phase out the state's individual income tax to be competitive with Arkansas' surrounding states, which include Tennessee and Texas, which don't levy an individual income tax.