Holiday sales lift December tax collections, state budget officials revise forecast ahead of 2018 fiscal session

Robust holiday sales receipts bolstered tax collections in December after Arkansas budget officials revised the state’s official general revenue forecast heading into the upcoming fiscal session that begins in early February.

In December, Arkansas net available general revenues jumped 11.5%, or by $53.7 million above year-ago levels to $521.1 million, which is also $23.7 million or 4.8% above the revised forecast. That left year-to-date available general revenues through the first six months of fiscal 2018 at $2.69 billion, or $74.5 million and 2.8% above year ago levels.

Just a month ago, Arkansas Department of Finance & Administration (DFA) Director Larry Walther advised the state Legislative Council (ALC) that net available revenues for fiscal year 2017, which ended on July 31, now total only $5.34 million, a decrease of $19 million or 0.4%.

The year-end adjustments left the official general revenue forecast for fiscal 2018 at $5.45 billion, but resulted in selected changes to gross revenues, income tax refunds and set-asides for the state’s Educational Adequacy fund based on final fiscal year sales tax collections.

In his note to the legislature, Walther advised that the new 2018 revenue forecast is an increase of $104.4 million, or 2% from year ago levels, but noted that sales and use tax collections and corporate income tax filings were below forecast through the first fourth months of the fiscal year. According to Walther, economic models employed by DFA indicate continued growth in key economic drivers for revenue gains in Arkansas with moderate job gains and rising wage income. He predicted that private sector job growth will decelerate slowly over the next two years as the state labor market tightens and rising interest rates constrain activity and rates of new investment.

“High-growth areas of the state will continue to drive state averages higher in jobs, income, and growth in local labor force,” Walther predicted. “Rising wages in core sectors plus slight acceleration in inflation explain the forecast pattern of acceleration in nominal incomes and consumption over a period of decelerating job growth.”

Walther said the Arkansas economy remains near the national average growth rate after maintaining a stable footing in earlier phases of the recovery. He said forecasts for state growth indicate nominal growth of 3.5% to 4.5% “in a low but rising inflationary setting.”

“Consumers will again be an important driver for growth along with further recovery in housing markets and business investment,” he said.

DECEMBER NUMBERS
December sales tax collections were above year ago levels and the revised forecast by a strong $10.2 million. According to John Shelnutt, DFA’s director of economic analysis and tax research, sales tax collections were higher in most business sectors and all-important retail industry during the holiday shopping session, but fell short in car sales.

In addition, December gross general revenues rose to $589.4 million, which is $52.6 million or 9.9% from above year ago levels, and $21.4 million or 3.8% above forecast. Individual income tax collections for the month jumped to $262.7 million, up 12.3% or $28.8 million from a year ago and $11.5 million or 4.5% above forecast. Individual withholding tax collections rose 9.7%, reflecting anticipated payday timing effects ahead of Christmas.

Corporate income collections in December, which closes out the calendar year for most Arkansas businesses, rose to $66.8 million, a increase of $4.3 million, or 6.8% from a year ago, but $1.9 million or 2.8% below forecast.

Gov. Asa Hutchinson said the December report is a sign of “great” consumer confidence.

“December revenues show the strength of the Arkansas economy. Revenue exceeds our projection for December and reflects a record $589 million in gross general revenues. This report starts 2018 with a very optimistic ring and sets the stage for the upcoming fiscal session. Most encouraging to me was the sales tax collections which exceeded projections and demonstrate a great deal of consumer confidence. This is all good news, but I am mindful that some taxpayers paid their income taxes early and so we will continue to be conservative in our approach to the budget, which will be presented to the General Assembly in detail next week.”

FISCAL SESSION
The Arkansas General Assembly’s biennial fiscal session begins on Feb. 12 at the State Capitol, where lawmakers will consider budget requests for fiscal year 2019 and consider other financial matters concerning the state’s operations. The Arkansas Revenue Stabilization Act mandates a balanced budget to provide appropriate funding levels for all the state’s major priorities under Gov. Asa Hutchinson’s earlier $5.5 billion budget for fiscal 2018.

To date, Gov. Hutchinson has not outlined budgetary plans for the upcoming fiscal session. The Joint Budget Committee will hold hearings next week on the budget requests for the Higher Education Institutions, Department of Education Public School Fund Account, the Department of Human Services, Department of Health, Department of Correction and the Department of Community Correction, commonly referred to as the “Big 6.” Other agencies may be heard after receiving approval from the Legislative Council or the Joint Budget Committee.

Arkansas voters approved a constitutional amendment in December 2008 that requires the legislature to convene in fiscal sessions in even-numbered years. The fiscal session will last 30 days, unless extended by a 75% vote of each chamber. The fiscal session cannot be extended any more than 15 days, so the longest fiscal session allowable is 45 days.

Through December, the fifth month of the state’s 2018 fiscal year that began July 1, year-to-date available general revenues were $2.17 billion, up 1%, or $20.8 million above year ago levels. Revenue collections were down 1.2%, or $26.8 million below forecast from July to December. Through the first four months of fiscal 2018, most major categories were flat or below the yearly forecast set the state’s budget officials at DFA. For example, sales and use tax collections came in well below expectations by 3% or $30.1 million. On a year-to-date basis, however, sales were slightly up by 0.7%, or $7.2 million to $979.9 million.

That flat November report caused Hutchinson to issue a statement that state tax collections, while modest, were headed “in the right direction.”

Altogether, year to date gross tax receipts now stand at $3.12 billion, up $91.6 million compared with the same period a year ago. That tally is also $21.4 million or 0.9% above forecast, state budget officials said.

Yearly individual income tax collections, which have remained relatively strong in fiscal 2018, were a robust $1.45 billion, or $64.2 million, or 4.6% above year ago levels, and $11.5 million, or 0.8% above forecast. On a yearly basis, sales and use tax collection now total $1.2 billion, up $24.4 million or 2.1% from a year ago and $10.2 million or 0.9% above the revised forecast.

OTHER TAX REVENUE SOURCES
Alcoholic beverages
July-December 2018: $27.9 million
July-December 2017: $27.4 million

Games of skill
July-December 2018: $30.7 million
July-December 2017: $28 million

Tobacco
July-December 2018: $112.3 million
July-December 2017: $110.2 million

Insurance
July-December 2018: $42.7 million
July-December 2017: $43.6 million