Spike in February income tax collections bolster the state’s revenue picture

A $28.5 million spike in income tax collections and an anticipated boost in sales tax collections from Amazon and other online retailers eased concerns at the State Capitol after state budget officials released Arkansas’ monthly budget report today (March 2).

Just before lawmakers began committee meetings on Thursday, the state Department of Finance and Administration reported that net available general revenue in February came in at $276.7 million, $3.2 million or 1.2% below last year and $40.9 million or 17.3% above forecast.

Year-to-date net available general revenues totaled $3.43 billion, $19 million or 0.6% above year ago levels. Now, eight months into the fiscal year, net available revenue is below forecast by $15 million or a decline of 0.4%.

Last month, year-to-date net available general revenues totaled $3.15 billion, $22.3 million or 0.7% above year ago levels. In January, net available revenue fell behind forecast by $57.1 million, or a decline of 1.8%.

Gov. Asa Hutchinson told reporters during a bill signing ceremony for the ArFuture grant program that he was pleased with the rebound in revenue growth in February.

“It bounced back the way we had hoped (and) it reduces significantly the concern about having to adjust the forecast,” Hutchinson said at the Governor’s Conference Room. “We still will look at it month-by-month and evaluate it again next month, but hopefully that will mean we will not have to adjust the forecast.”

Downstairs after a meeting of the House Committee on Revenue and Taxation ended, Rep. Joe Jett, R-Success, also expressed some optimism about the state budget after getting a preview of the revenue report, especially noting that forecasted net available revenue month-to-month was trimmed nearly 75% to only $15 million.

“It looks like we are on an uptick. We are only down $15 million as opposed to $58 million,” Jett said. “If everything holds together, I think we are on track to come over what we are projected.”

Shortly after enacting a $50.5 million tax cut for low-income Arkansas workers into law, Hutchinson 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.

AMAZON TAX WINDFALL IMPACTING BILL FILINGS AHEAD OF MARCH 5 DEADLINE

Besides the improving revenue picture, debate is ramping up in the General Assembly over the expected revenue windfall from a so-called Amazon bill that would allow Arkansas to collect state and local sales taxes from online retailers that do not have a physical presence in the Natural State.

Earlier in Jett’s committee, Rep. Jim Hendren, R-Gravette, pulled down a six-page bill that would force the state to return half of all proceeds from sales and use tax collections from out-of-state online retailers to Arkansas taxpayers.

Already twice in February, the same House panel has replayed almost verbatim two different meetings that rejected Senate Bill 140 by Sen. Jake Files, R-Fort Smith, which would set up the process for Amazon and other remote retailers to begin collecting sales taxes from online purchasers in Arkansas.

However, SB140 has failed twice as Democrats on the panel attempted to insert an amendment on the bill that would divert $25 million from Internet sales to pay for local needs. Files said the attempt to revise his bill again by Democrats in the House committee would not be legally defensible. He said he also prefers any decisions on how to spend future state revenues go through the Legislature’s budget process under the Revenue Stabilization Act (RSA) that categorizes and prioritizes state spending.

Besides Hendren’s bill, there have been at least another half-dozen filed in both the House and Senate that directly or indirectly look to draft new tax policy or funnel new revenues from Amazon and other online retailers to specific needs, ranging from police and fire trucks to increased pre-K spending and additional tax cuts.

Meanwhile, DF&A economist John Shelnutt said Thursday the state’s revenue picture should begin to balance out in the remaining months of fiscal 2017, which officially ends on June 30. He said the improving Arkansas and U.S. economy will likely bolster state budget coffers through the end of the fiscal years as revenue collections improve.

Concerning February’s robust collections, Shelnutt said income tax collections were impacted by a timing shift relative to forecast in payroll withholding tax collections during the month.

“The timing shift involved expectations of lower revenues from fewer paydays in the reporting month than last year,” he said. “This caused a gain of $28.5 million and more than balances out a negative shift in January.”

Shelnutt also said that DF&A began collecting sales and use taxes from Amazon on March 1. However, state budget officials won’t post any revenue data from the online retail giant until after the first month of collections, he said.

Jett said that he expects to run Files’ Amazon tax bill next week in committee. He said Files is working out a compromise with Democrats so the bill can move out of the House panel, although he offered no details.

“They think there is a possible way to work through this, I rather not say yet what it is in case it blows up, but right now I am hearing some positive news,” said the Northeast Arkansas lawmaker.

FEBRUARY TAX NUMBERS

Meanwhile, overall February results were above forecast in two major categories of collections, including individual income tax collections and corporate refunds, state budget officials said. Among other major categories, sales and use tax collections and corporate income tax collections came in below forecast.

However, February gross revenue collections were $432.4 million, an increase of $12 million, or 2.9% above last year, and $19.5 million or 4.7% above forecast. Year-to-date gross collections were up $29.3 million, or 0.7% to $4.08 billion, but below forecast by $50.8 million, or 1.2%.

February sales and use tax collections continued to trend slightly below expectations. Revenue tallies for the month were $182.7 million, up 2.5% or $4.4 million. Collections were below monthly forecast levels by $3.6 million, or 1.9%.

Monthly individual income tax collections totaled $214.9 million. Collections increased by $9.1 million, or 4.4% from last year. Collections were a whopping $23.7 million or 12.4% above forecast. Individual withholding increased 7.3% compared to last year, due to a significant payroll timing shift that benefited collections in February, DFA officials said.

February individual income tax refunds totaled $96.6 million, $8.5 million or 9.6% above last year and $25.0 million or 20.6% percent below forecast. Corporate income tax refunds were $8.4 million. This amount is $4.0 million above year ago levels. Refund amounts below forecast add to net available fund results, DF&A officials said.

Monthly corporate income collections totaled $4.4 million, a decrease of $1.6 million from a year ago, and $1.6 million below forecast. February tobacco tax collections, a smaller component of general revenue in annual terms, were $16.6 million, about $1.3 million above forecast.

OTHER TAX REVENUE SOURCES

Alcoholic beverage
July-Feb. 2017: $35.8 million
July-Feb. 2016: $35.2 million

Games of skill
July-Feb. 2017: $37.5 million
July-Feb. 2016: $35 million

Tobacco
July-Feb. 2017: $144.8 million
July-Feb. 2016: $146.8 million

Insurance
July-Feb. 2017: $45.1 million
July-Feb. 2016: $45.6 million