State tax coffers decline for third straight month in fiscal 2017, sales and corporate tax collections down

State revenue collections fell below expectations for the third straight month in fiscal 2017 as sales and corporate income tax collections saw marked declines in September, state budget officials said Tuesday (Oct. 4).

According to the monthly financial snapshot of state government released by the Arkansas Department of Finance & Administration (DF&A), net available general revenues in September totaled $515.5 million, or 0.1% or $500,000 below last year and $16.7 million or -3.1% below forecast.

DF&A economist John Shelnutt said the combination of one-time items from corporate income tax collections a year ago and weak consumer sales collection primarily from the retail sector, have affected state tax collections through the first quarter of the fiscal year.

“We know there were some extraordinary collections last year, in particular some overpayments from corporate that were altered in the new payments made this year lowered as adjustment from what happened (a year ago),” said Shelnutt, the state’s director of Economic Analysis & Tax Research.

Shelnutt added that those negative, one-time budgetary issues will phase out over the next three-month period, just ahead of the 2017 legislative session that begins in January. “We already (know) that is the case looking ahead,” he said.

Concerning lower sales tax collections, Shelnutt said weaknesses in consumer spending at the national and regional levels is also filtering down to Arkansas households.

“On sales tax, again it is the combination of extraordinary purchasing patterns in the first quarter a year ago …., but also some current weakness in sales tax at the consumer level,” said Shelnutt. “We have seen evidence of that beyond Arkansas at the national level and surveys of other states and scanning of other states’ collections.”

Jeremy Horpedahl, an economist at the University of Central Arkansas’ Center for Research in Economics, said the current revenue picture in Arkansas is not “necessarily troubling” given that the state is only 2.3% below forecast three months into the fiscal year.

“Looking at the details, the big shortfalls are in sales taxes and corporate income taxes, but individual income taxes are right in line with the forecast. These details suggest that individuals are earning personal income as predicted, but not yet spending all of it,” said Horpedahl, an assistant professor of economics at UCA. “In percentage terms, the biggest drop has been in corporate income taxes, which are typically the most volatile and unpredictable source of revenue.”

For the three-month period ended Sept. 30, year-to-date net available general revenues were $1.33 billion, about $4.3 million or -0.3% below year ago levels. Net available revenue are $32 million or 2.3% below forecast.

On a year-to-date basis, sales and use taxes total $589.6 million, a decrease of $6.5 million or -1.1% from a year ago and $27.9 million or -4.5% below forecast.

Corporate revenues for the year totaled $85.1 million, a decrease of $21.5 million or -20.1% compared to 2016, and $25.1 million or -22.8% below forecast.

September gross general revenues totaled $578.8 million, an increase of $1.7 million or 0.3% above last year, but still $17.0 million or -2.9% below forecast. Sales and use tax collections for the month were $196.4 million, a decrease of $2.1 million or down 1% from a year ago. Collections were below monthly forecast levels by $10.9 million or -5.3%.

September individual income tax collections rose by 3.9% or $10.5 million to $275.8 million. With respect to the forecast, collections were $1.3 million or 0.5% above forecast as individual withholding increased 6.2% compared to last year.

On the other hand, individual income tax refunds in September fell 4% or by $200,000 to $4.9 million, or $100,000 or -2% below forecast. Refund amounts below forecast add to net available fund results.

As noted by Shelnutt, September corporate income tax collection saw a decrease of $7.3 million from a year ago to $72.8 million. That tally is $9.7 million or -11.8% below forecast. Corporate income tax refunds total $3.2 million, up $1.6 million above forecast and year ago levels, respectively.

Among smaller component of general revenue in annual terms, tobacco tax collections were $17.6 million, down by $1.0 million or -5.4% from year earlier levels and above forecast by $300,000. Monthly changes in tobacco tax collections can be attributed to uneven patterns of stamp sales to wholesale purchasers, state budget officials said.

State collections for gaming revenues, however, were up $1 million, or 8.1% from a year ago at $13.1 million. Also of note, the state economic development incentive fund expended $3.1 million at the end of September, a 43% boost from a year ago. Over the past several weeks, state economic development officials have made several job announcements as Arkansas employers continue to grow and add jobs the state’s labor pool.

BUDGET FORECAST FOR 2017 LEGISLATIVE SESSION STILL UNCLEAR
It remains to be seen if the declining state tax coffers will affect planning for the upcoming 2017 legislative session that begins in January. Gov. Asa Hutchinson has signaled that he will ask for additional income tax cuts and press for other changes to the state’s tax code.

Arkansas Senate President Jonathan Dismang, R-Searcy, said in a recent interview with Talk Business & Politics that it’s too early in the pre-session process to predict how large of a tax cut will be pushed in the next General Assembly. Dismang said until the state’s revenue picture becomes clearer and Gov. Asa Hutchinson puts forth his plans, lawmakers are in a wait-and-see mode.

Horpedahl said state policymakers will still need to monitor the situation closely over the next three months to see if consumer spending picks up, “but one potential lesson for tax reform next year is for Arkansas to be less dependent on volatile revenue sources such as corporate income taxes,” he said.

Hutchinson is expected to outline 2017 fiscal budget sometime between now and early November. By law, state budget officials have to release the forecast update to lawmakers two months before the 2017 general session. That puts the budget reckoning day at Nov. 10, two days after the presidential election.

“That will be the forecast for the biennium, so it will have (fiscal) 2018 and 2019 figures, with an update to the current year,” Shelnutt said.

OTHER TAX REVENUE SOURCES
Alcoholic beverage
July-Sept. 2017: $14.3 million
July-Sept. 2016: $13.2 million

Games of skill
July-Sept. 2017: $14.1 million
July-Sept. 2016: $13.1 million

Tobacco
July-Sept. 2017: $54.6 million
July-Sept. 2016: $57.5 million

Insurance
July-Sept. 2017: $22.2 million
July-Sept. 2016: $22 million