Gov. Hutchinson tells state agencies to develop ‘contingency plans’ as state tax collections slow

One day after enacting a $50.5 million tax cut for low-income Arkansas workers into law, Gov. Asa Hutchinson on Thursday (Jan. 2) told reporters he has sent state agency directors a “cautionary note” to develop contingency plans in the face of January’s dismal tax collections.

“Whenever you evaluate the revenue month to month, you see fluctuations. This is exactly the reason that I wanted to make sure that our tax cut was responsible and on the conservative side, recognizing there could be ups and downs on the revenue stream,” Hutchinson told reporters gathered at his State Capitol office.

Hutchinson said he would not yet adjust the budget and would wait to see what happens in the next two months. For now, he said he would instruct agency directors that could be impacted if the budget is adjusted to have contingency plans, with a possible reduction in lower priority Category B funding, which is released June 1.

In the meantime, Hutchinson said he will send agency directors a “general cautionary note, (to) develop contingency plans with more specific information to follow.” Hutchinson’s sentinel on the state’s fiscal health followed the release of the January revenue report, the first snapshot of the state tax collections since the 91st General Assembly began on Jan. 9. Going into the session, the Department of Finance and Administration reported 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.

Overall, the governor’s $5.5 billion budget proposal 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. 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.

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.

TAX REVENUE CONCERNS
However, January’s revenue report shows net available general revenues came in at $535.9 million, $15.9 million or 2.9% below last year and $47.1 million or 8.1% below forecast. Year-to-date net available general revenues total $3.15 billion, $22.3 million or 0.7% above year ago levels. Today, after seven months into the fiscal year, net available revenue is below forecast by $57.1 million or a decline of 1.8%.

More troubling to some budget watchers is that year-to-date gross tax collections totaled only $3.64 billion, representing an increase of just $17.3 million or 0.5% above last year. For the year, that puts gross general revenues are below forecast by $70.3 million or  down 1.9%.  January gross collections, the total of all revenue sources, came in at $614.4 million, a decrease of $13.6 million or 2.2% below last year and $55.6 million or 8.3% below forecast.

State budget officials said the disappointing January results were impacted by a modification in payroll withholding tax collections during the month.

“The timing shift involved expectations of higher growth from more paydays in the reporting month than last year,” DF&A economist John Shelnutt wrote in the monthly report. “Lack of this payday gain because of early holiday-related payrolls a year ago caused the shortfall and will shift a gain against forecast to February results.”

Due to this timing issue, payroll withholding collections were $20.5 million below forecast but above year ago collections. Also, individual and corporate income were below forecast as a result of lower than expected estimated payments in January. Among other major categories, sales and use tax collections were off by $6 million, or 2.9% below forecast at $200.5 million. A key barometer of consumer spending, this key category took an unexpected negative turn jumping more than 8% during the holiday shopping season.

HUTCHINSON: TAX CUTS RESPONSIBLE WITH CONSERVATIVE BUDGET
Despite the budget pinch, Hutchinson said he is comfortable with the individual income tax collections, which he said was the result of a timing issue that should be made up in February. He said the corporate and sales tax collections over the last seven months is a greater concern, and he would continue to evaluate the issue.

“We’ve seen enough of a pattern on the sales tax collections, particularly corporate income tax collections, that we want to be prepared just in case that this is recovered next month or the following month,” he said.

Hutchinson also told reporters he was aware of the new revenue numbers Wednesday when he signed into law a $50.5 million tax cut. He said that tax cut “is a responsible approach in relation to the budget we have.” He said the news also confirms the need to offset a tax cut for military retirees by raising taxes elsewhere.

“This is not unanticipated in terms of the tax cuts. This justifies and supports my cautious approach to tax cuts,” he said.

The governor said he reviewed the forecast for fiscal year 2018, and DF&A is confident with those forecasts. “If we have to revise it, we will revise it, but that’s not something that I see needing to be done at this time,” Hutchinson said, adding that he does not expect any layoffs.

On Wednesday, Sen. Jake Files, R-Fort Smith, told Talk Business & Politics he is concerned about tax-cutting policy getting beyond revenue reality. He said he is eager to cut as many taxes as possible, but says “such cuts should not be premature.” He also said he hopes for a process that can bring in more stakeholders from around the state to make tax decisions based on future-leaning policy decisions rather than just making political decisions “that simply seek to balance revenue and expenses at the end of the year.”

During discussion in the first week of the session in the Senate Revenue and Tax Committee, which Files chairs, the state’s top economic forecasters said they were confident lagging tax collections in the first half of fiscal 2017 would continue improving and enable lawmakers to fully enact the governor’s $50.5 million tax cut proposal.

SENATE LEADER SAYS NO NEED TO PANIC
Sen. Jim Hendren, R-Gravette, one of the chief sponsors of the governor’s tax cut plan, said “nobody needs to panic.”

“I think obviously there’s some aberrations, but it seems like there’s always aberrations. But it’s time for concern, it’s time for us to develop a plan in the event that it doesn’t pick up, but it’s certainly not a crisis,” Hendren said. “If, I think, by the end of the session, if we don’t see some improvement, we’ll have to start looking at adjusting the budget.

“My philosophy is, you start with the revenue side of it, what are we doing for the taxpayers, and then you adjust the budget, versus you do the budget, and then you see if there’s anything left for the taxpayers,” said the Senate Majority leader.

Meanwhile, the second plank of Hutchinson’s tax cut plan was given final approval in the Senate on Thursday, just as news of the governor’s contingency plan was winding its way through the halls of the State Capitol.

That legislation – an exemption on all retirement income for military retirees and their families – has been at the center of state tax policy debate at the Capitol as the Senate approved a 34-page amended version of the governor’s original bill by levying new or additional tax hikes on unemployment benefits, soft drinks and candy, and digital downloads for books, movies, DVDs and ringtones to pay for the military tax exemption.

The most controversial part of the legislation, however, is a $13.4 million syrup tax cut that sponsors admitted was inserted into the military tax exemption to make the bill revenue neutral. As in the House, some of the Senate’s fiscal conservatives railed that the bill was not good tax policy, shifting tax burden from one group to another. Hendren, one of lawmakers approving the 29-0 Senate decision, said it was wise to have a revenue neutral bill with the military tax cut.

“The tax part of it is behind us now,” he said. “If we have to adjust, we’ll adjust the budget, which is the way that we do in the real world, so I think it’s appropriate for us to do it that way in the government.”

Hutchinson, who has been able to push more than $150 million in tax cuts through the legislature in the past two general sessions, said any adjustments likely would be across-the-board fine-tuning rather than targeting those agencies. Only agencies funded with $127 million in Category B funding would be impacted. Those include:
• Department of Human Services, $88 million;
• General Education, $23 million;
• Behavioral Health, $3.5 million;
• Higher Education, $2 million;
• Department of Economic Development, $1.5 million;
• Department of Correction, $4 million; and
• Merit Adjustment Fund, $5.2 million.

(Talk Business & Politics reporter Steve Brawner contributed to this story.)