State budget forecasters optimistic about tax revenue, say budget can ‘fully fund’ governor’s tax cut plan

Two of the state’s top economic forecasters told a Senate panel on Wednesday they are confident lagging tax collections in the first half of fiscal 2017 would continue improving and enable lawmakers to fully enact Gov. Asa Hutchinson’s $50.5 million tax cut proposal.

The Senate Revenue and Taxation Committee, chaired by Sen. Jake Files, R-Fort Smith, held their first organization meeting to get an update from state Department of Finance and Administration (DFA) officials on where the state’s stands before lawmakers began debate begins on the governor’s plan to cut taxes for workers making less than $21,000 annually.

In outlining the health of the state tax collections, Department of Finance and Administration economist John Shelnutt told lawmakers that a strong spike in sales and use collections in December’s bolstered the six-month results for the fiscal year that began July 1, 2016. However, Shelnutt noted that total net available revenue for the month was mostly offset by a decline in corporate and individual income tax collections, which he said have picked up steam in December and are forecasted to continue improving for the remainder of the fiscal year.

“I do have reason for being optimistic for the second half (of fiscal) 2017,” Shelnutt told lawmakers. “We think exposure to weakness in corporate refunds are past us. I think corporate collections and refunds are back to the usual volatility we are use to and not the extra hit that we saw in the first half of the fiscal year.”

Going into the session, net available revenue in December totaled $467.4 million, $3.2 million or 0.7% above last year and $1.8 million or 0.4% above the estimate. According to DF&A, the executive recommendation calls for an upward revenue revision of 2.9% when compared to the fiscal 2017 forecast, which would bring in an expected $153.5 million in additional funding for the year.

The budget proposal also calls for a 2.8% increase in general revenues in fiscal year 2018, up $149.1 million, and a 4.9% increase in fiscal year 2019, up $266 million. General revenue are primarily drive by individual and corporate income ta collections, sales taxes and other tax collections by the state.

Gov. Hutchinson’s proposed $50.5 million plan for the second round of tax cuts in his tenure as governor is part of his balanced budget of nearly $5.5 billion for the biennium.. That budget plan calls for a robust 4.4% increase in general revenues in fiscal year 2019 of $5.7 billion, up $964.6 million from fiscal year 2018.

After Shelnutt’s testimony, the legislature’s top economic forecaster expressed some concerns about collections for the first six months of the fiscal year, but was hopeful that the rest of the 2017 would improve.

“It is true that the first six months were under forecast and it is refreshing to see Dr. Shelnutt’s optimism,” said Richard Wilson, assistant director of Bureau of Legislative Research. “So far, slow and steady seems to be the course.”

In his brief testimony, Wilson told lawmakers that the legislature will able to enact the governor’s tax cuts within the current budget, albeit with some reservations about consumer spending and corrections to income tax collections that will increase refunds in the upcoming tax season.

“It looks like the budget will be fully funded with a little bit leftover,” he said.

Shelnutt and Wilson’s testimony also elicited several questions from lawmakers concerning the impact of increasing Internet and online sales by Arkansas consumers on lower sales and use tax collections. Sen. Jason Rapert, R-Conway, asked DF&A to consider providing taxpayers with more information about remitting sales and use taxes to the state after making online purchases with out-of-state vendors.

Sen. Bill Sample, R-Hot Springs, also expressed some reservations about whether the second half of the fiscal year will meet expectations, citing rising gasoline prices and weak consumer spending.

“The way I look at it – plan for the worse, hope for the best,” Sample said of the state’s budget forecast. “I think consumer and business spending needs to be well ahead of forecast.”

After the Senate meeting, Files said when lawmakers get an opportunity to review the governor’s proposal, he expects the legislature to move quickly to consider the measure.

“I anticipate in the next two weeks on hearing testimony on some parts of the tax cut,” he said.

Files also said he was comfortable with the budget forecast going into the session, citing some adjustments made by DF&A forecasters that offered more detailed explanations on fluctuations in sales and use tax and corporate and individual income tax collections.

“Seeing some of the recent corrections has helped, but I would like there to be more data for us to base our (decisions) on, but I believe more members feel comfortable going into the session with the conservative approach the governor has taken,” Files said.