State revenues rise in October despite weak consumer spending

As budget hearings continue at the State Capitol this week, Arkansas tax collections rebounded in October after seeing noticeable declines in the first quarter of fiscal year 2017.

According to the monthly financial snapshot of state government released Wednesday (Nov. 2) by the Arkansas Department of Finance & Administration (DF&A), net available general revenues in October were $439.1 million, a gain of $33.2 million or 8.2% above last year and $8.9 million or 2.1% above forecast. State budget officials said collections were well above forecast in individual and corporate income tax collections, but weak growth in sales and use tax revenue offered some pause to local economy watchers.

“The robust growth in income tax revenue shows that Arkansas’s economy continues to perform well. While sales tax revenue is still below forecast, it is unlikely to stay that way,” said Jeremy Horpedahl, assistant professor of economics at the University of Central Arkansas’ Center for Research in Economics. “Consumers want to spend the income they earned at some point, they are just holding onto it right now.”

‘DISCONNECT’ WITH CONSUMER SPENDING
Michael Pakko, chief economist and state economic forecaster at the Institute for Economic Advancement (IEA) at the University of Arkansas at Little Rock, also noted what he called the “disconnect” between rising income and tepid consumer spending.

“Year-to-date individual income tax collections are 4.5% higher than the previous year, and slightly above forecast. In contrast, Sales and Use tax collections are down slightly from last year and nearly 4% below forecast,” Pakko said. “This would seem to indicate that income growth in Arkansas is doing just fine, but consumer spending is not keeping pace.”

Still, the rosier October revenue report should provide some relief to Arkansas budget officials, lawmakers and Gov. Asa Hutchinson, who expressed concerns last week about slow revenue growth in the first three months of the new fiscal year that began on July 1.

“If we do not have good revenue numbers, you certainly have to consider that we have to slow down in our tax cut plan because of that,” Hutchinson said in an interview with Talk Business & Politics. “I’m not worried about our sales tax collections, but I’m a little puzzled by it because every economic growth sign is incredible in Arkansas right now – low unemployment, high GDP growth, median income is going up, so I like where we are. I think the sales tax collections will come back… I’m just not going to put the stability of the state, the integrity of the state at risk.”

Gov. Hutchinson issued this statement Wednesday about the October numbers: “The revenue report for October shows steady growth and brings us closer to hitting our forecast for the year. Individual income taxes are a particularly bright spot. Even after accounting for the landmark income tax cuts adopted in 2015, we’re still seeing solid growth in individual income tax collections. This is a good sign that more Arkansans are working hard and earning more.

“In fact, 56,000 Arkansans have moved off SNAP benefits in the last year. This month’s report shows a different and more positive outlook for Arkansas’s economy than we’ve seen in the past several months.

“As I work on the budget for the next biennium, I do intend to be mindful of the current unpredictability of consumer spending and we will continue to take a conservative approach in budgeting.”

HESTER STILL PUSHING FOR TAX CUTS
Hutchinson raised his concerns after Sen. Bart Hester, R-Cave Springs, proposed a $105 million income tax relief plan that would expand the current 5% income tax bracket to all taxpayers with annual incomes between $25,000 to $50,000. Hester’s tax plan would benefit people with incomes of $21,000 to $35,000, or add another 187,000 to the 5% income tax bracket, he said. After reviewing the October report, Hester said he believes Arkansas will continue to see healthier economic numbers over the remainder of the fiscal year that runs through June 30, 2017.

“There are many issues pulling for increased funding to eat up any surplus we will have. I commit to putting the taxpayer at the front of that list,” said Hester, a member of the Senate Committee on Revenue and Taxation, the Joint Budget Committee and the Legislative Council.

Hester and other lawmakers will get a clearer picture of budget expectations for the general session 90th General Assembly next week, when Hutchinson is expected to release his budget plans on Nov. 9, a day after the presidential election.

In addition, the UCA research group and the Washington, D.C.-based Tax Foundation will release a study at the Old Supreme Court Chamber at the State Capitol on Nov. 14 to examine ways to improve and reform the Arkansas’ tax code.

“Since revenue has pulled ahead of last year and is about on target with official forecasts, there is no reason to hold back on the broader discussion of tax reform,” Horpedahl said.

THE OCTOBER NUMBERS
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 were $32 million, or 2.3%, below forecast. In October, however, year-to-date net available general revenues rebounded by $28.9 million, up 1.7% from a year ago to $1.77 billion. Net available revenue is still slightly below forecast by $23.2 million, down 1.3%.

Overall, October gross collections totaled $530 million, up 8.1% compared with last year and 3.8% above forecast.

And even as recent regional and national reports show that consumers are more cautious about spending ahead of the Nov. 8 election, Arkansas’ sales and use tax coffers rose by 2.6% from a year ago to $198.6 million in October. Collections were still below monthly forecast levels by $3.7 million, or down 1.8%.

Corporate income tax collections rose to $41 million, an increase of $10.5 million from year ago, and $17.9 million above forecast. October individual income tax collections increased by $22.2 million, or 9.5% over last year to $256 million.

OTHER TAX REVENUE SOURCES
Alcoholic beverage
July-Oct. 2017: $18.5 million
July-Oct. 2016: $17.5 million

Games of skill
July-Oct. 2017: $18.9 million
July-Oct. 2016: $17.3 million

Tobacco
July-Oct. 2017: $74.2 million
July-Oct. 2016: $76.4 million

Insurance
July-Oct. 2017: $22.8 million
July-Oct. 2016: $22.7 million