Arkansas government closes out fiscal 2018 with $41.7 million surplus

Arkansas ended fiscal year 2018 with a tidy surplus of nearly $42 million as moderate growth from sales tax collections and strong payroll additions to the state’s brimming labor force lifted the broader economy.

For the fiscal year ended June 30, the Department of Finance and Administration (DFA) reported net available general revenue collections of $5.49 billion, up $146.3 million or 2.7% above year ago levels, and $41.7 million, or 0.8% above the state’s forecast.

Gross tax revenue, a broader economic indicator that includes collections from all available categories, also increased 2.7% to $6.726 billion, up $174.7 million above the same period in 2017. However, in relation to the forecast, gross collections were mostly flat at only $8.3 million, or 0.1% above expectations.

At a State Capitol press event on Tuesday (July 3), Gov. Asa. Hutchinson highlighted the year-end surplus as a windfall from the state’s near-record employment levels that included more than 1.35 million workers at the end of May.

“Our revenues are up because of our strong job growth as well as the growth in our retail sector,” the governor said.

DFA’s year-ending revenue forecast is consistent with a letter that agency Director Larry Walther sent to the Joint Committee on Economic and Tax Policy in May that the state would not need to adjust the state budget to have ample general revenues going into fiscal year 2019, which began on July 1.

“At this time, economic indicators do not warrant an adjustment in the official revenue forecast. The economic recovery is continuing and revenue growth is encouraging, (and) significant adjustments above or below the current growth profile are not justified,“ Walther wrote in his May 16 letter to Rep. Laurie Rushing, R-Hot Springs, co-chair of the joint legislative panel.

Walther’s memo to the legislative panel follows a state law that requires Arkansas’ chief fiscal officer to provide a forecast of general revenues ahead of new the fiscal year. In late 2017, Walther advised the Arkansas Legislative Council (ALC) that net available revenues for fiscal year 2017 ended with a revised total of only $5.34 billion, a decrease of $19 million or 0.4%.

Those 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 ahead of the 2018 fiscal session that started in January, Walther advised lawmakers that the new 2018 revenue forecast was a slight 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 forecasted continued growth in key economic drivers for revenue gains in Arkansas with moderate job gains and rising wage income. He also 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.

At the end of the recent 2018 biennial fiscal session in March, Hutchinson signed off on a $5.6 billion budget for fiscal 2019, a modest 2.8% increase in general revenues.

According to DFA economist John Shelnutt, the fiscal year ended above forecast because of sustained growth in individual income tax collections and lower than expected deductions from gross revenue. The main revenue drivers, sales tax collections and payroll withholding, showed moderate to robust growth of 3.4% and 4.6%, respectively, he said.

Statewide, general revenues are primarily driven by individual and corporate income tax collections, sales taxes and other tax collections by the state. Among the major categories, Shelnutt said that individual income tax refunds increased while corporate refunds declined for the year. Gross revenue collections from corporate income tax filings were also below forecast and year ago levels.

Beside gross and net available revenues, individual income tax revenue for the fiscal year 2018 totaled $3.359 billion, up $144.8 million or 4.5% above year ago collections, and $36.5 million or 1.1% above forecast. Income tax refunds year-to-date, which subtract for net available revenue, totaled $493.4 million, up 10.4% compared to the same period a year ago and 1.7% above forecast.

Year-to-date sales and use tax revenue was $2.417 billion, up $79.5 million or 3.4% compared with the previous year and fractionally below forecast. Corporate income taxes for the year fell 6.3% to $406.7 million, which is $27.2 million below year ago levels and $59 million or 12.7% below forecast.

In June, general revenues totaled $557.9 million, or $13.8 million or 2.4% below year ago levels and $2.5 million or 0.4% below the monthly forecast. Revenues in the final month of fiscal 2018 were above year ago levels in individual income and sales tax collections, but down by a large margin in corporate income tax payments.

June gross revenue collections were $659.1 million, a decline of 1.1% or $7.1 million and $13.6 million or 2% below forecast. State budget officials said year ago comparisons of gross revenue are impacted by alternating annual swings in deposits from the state Insurance Department, which is required by law.

OTHER TAX REVENUE SOURCES
Alcoholic beverage
July-June 2018: $59.4 million
July-June 2017: $57.5 million

Games of skill
July-June 2018: $64.5 million
July-June 2017: $60.3 million

Tobacco
July-June 2018: $219.9 million
July-June 2017: $221.6 million

Insurance
July-June 2018: $114.9 million
July-June 2017: $141.9 million