Arkansas tax collections tank in March, worries abound ahead of April tax season

One day after the 91st General Assembly approved the state’s $5.5 billion biennial budget, Arkansas’ March revenue report shows tax collections are well below expectations and year-ago levels with only three months left in the fiscal year. Still, state budget officials are hopeful as Arkansas enters the all-important April tax season.

For the month of March, however, net general revenues came in at a dismal $345 million, $68.7 million or 16.6% short of a year ago and $50.2 million or 12.7% below forecast, according to the state Department of Finance and Administration’s revenue report released Tuesday (April 4).

The year-to-date revenue picture was just as gloomy at $3.43 billion, $19 million or 0.6% above year ago levels. Now, nine months into the fiscal year, net available revenue is below forecast by $65.2 million or a decline of 1.7%. Last month, the state had a shortfall of only $15 million.

As predicted by DF&A officials during budget discussions at Joint Budget Committee hearings last week, the March numbers were impacted negatively by corporate tax filing dates changed by the Internal Revenue Service.

According to details of the proposed $5.49 billion biennial budget lawmakers reviewed and approved this week, the total estimated carryover from the general improvement act in 2015 is $239.4 million. The forecasted surplus for fiscal 2017, which ends on June 30, is $177.4 million.

Other one-time funds that will carry over into the new two-year budget period are $14.1 million in unobligated funds and $35 million in rainy day funds from the 2015 session. An additional $13 million will be recouped from general revenue balances in fiscal 2016 and 2017 and leftover monies from past state projects.

Gov. Asa Hutchinson said the trend could change in the next three months, but he is watching the numbers.

“This month’s revenue does not meet our monthly forecast largely because of a change in corporate filing deadlines. Even though the greatest portion of the shortfall will be corrected in the coming months, I am keeping a very watchful eye on our budget both in terms of revenue and expenses. It should be noted that individual income tax collections remain above last year’s level despite the $100 million tax cut that was in effect for the entirety of the last fiscal year.

“Keep in mind, we have three months left to go in this budget cycle, and a lot could change before July 1. April is typically the biggest month for state revenue, and next month’s results in particular will be important for any decisions as to whether the forecast should be adjusted or not.

“Given how much time is left before the end of the fiscal year, it would be premature at this time to make any changes to the budget or the forecast. I’ve previously advised our agencies to make contingency plans in the event the budget forecast will need to be adjusted. In the event adjustments are needed down the road, there should not be any impact to Category A spending.  This type of budget variance is the reason we included over $100 million in Category B which means the agencies cannot spend line items in Category B until late in the fiscal year.”

STATE BUDGET WILL BE ‘SORTED OUT’ IN APRIL
DFA Administrator for Economic Analysis and Tax Research John Shelnutt, said the month of April will be crucial in determining the state’s revenue picture for the end of fiscal 2017, which ends on June 30. Not only is April the tax filing deadline, but other revenue information will be gathered during the month, said the DFA economist.

“We have other things stacked up to happen this April that will be key for determining the course of the rest of the year,” Shelnutt told Talk Business & Politics.

Besides the shift in corporate filings, Shelnutt said the outcome for a number of individual income tax collection forecasts also come to a head in April.

“We are going to a get a lot of information basically in one month,” Shelnutt said, noting that state budget officials will have to sift through the financial data to determine if it will negatively impact overall tax collections for the remainder of 2017.

Shelnutt, who appeared before lawmakers at last week’s Joint Budget Committee meeting, said building the state’s forecast for fiscal 2017, which is conservative by design, state budget officials have closely watched the dynamics between income tax cuts from 2015 and tax refunds in hopes that they “square each other out.”

“So the dynamics between those items above the line and below the line will be sorted out in April,” he said.

In early February, when state revenues swooned below forecast, Gov. Asa Hutchinson sent state agency directors a “cautionary note” to develop contingency plans in the face of the month’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 State Capitol reporters.

At the time, Hutchinson said he would not yet adjust the budget and would wait to see what happens over the next few months. Still, the governor instructed 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.

On Monday, the House and Senate went into recess until May 1 after each passed the opposite chamber’s budget bills, which were identical to their own bills passed Friday. Legislators will return that day to complete any unfinished work and officially adjourn.

In the 2015 fiscal session, the total budget was about $5.2 billion, with spending in several state funds reduced by 0.6%. Hutchinson told reporters Monday that he expects to call a special session in May that will focus on aligning state law with waivers expected from the Trump administration for the Arkansas Works health care program. A special session could also take up highway funding and other budget issues.

THE MARCH NUMBERS
Overall, March results were below forecast in several major categories of collections, including individual corporate income and sales and use tax collections. The timing shift involved corporate returns and extension payments previously due in March and shifted to April in federal and adopted state law causing the two filing categories to slide $33.9 million from a year ago and $34.5 million compared to forecast.

Also, March gross revenue collections fell to $510.3 million, down $37.4 million or 6.8% below a year ago and $51 million or 9.1% below forecast. Year-to-date gross collections were down by $8.1 million or 0.2% to $4.59 billion, well below forecast by a whopping $101.7 million, or 2.2%.

March sales and use tax collections continued to trend below expectations. Revenue tallies for the month were $193.7 million, down 0.1% or $300,000. Collections were below monthly forecast levels by $8.9 million, or 4.4%. Monthly individual income tax collections totaled $240.2 million, up $3.8 million, or 1.6% from last year. Collections were slightly below forecast by 0.3%. Individual withholding increased 5.3% compared to last year, DFA officials said.

March individual income tax refunds totaled $103.5 million, $25.4 million or 32.4% above last year and $4.4 million or 4% below forecast. Corporate income tax refunds were $7.8 million, $4 million above year ago levels and $5.3 million above forecast. Refund amounts below forecast add to net available fund results, DF&A officials said.

As noted, March corporate income collections totaled only $27.6 million, a decrease of $38.4 million from a year ago, and $40 million below forecast. March tobacco tax collections, a smaller component of general revenue in annual terms, were $17.5 million, about $1 million above forecast.

OTHER TAX REVENUE SOURCES
Alcoholic beverage
July-March 2017: $40.2 million
July-March 2016: $39.7 million

Games of skill
July-March 2017: $43.1 million
July-March 2016: $40.7 million

Tobacco
July-March 2017: $162.3 million
July-March 2016: $165.4 million

Insurance
July-March 2017: $61.3 million
July-March 2016: $61.9 million