Arkansas ends fiscal 2019 with $295 million surplus, Gov. Hutchinson touts economic growth

Arkansas budget coffers overflowed with a surplus of nearly $300 million at the end of fiscal year 2019 but state tax officials are budgeting conservatively for the next 12 months because of a slowing economy and the elimination of one-time factors that boosted revenues over the past year.

For the 12-month period ended June 30, net available revenue rose a robust 7.8%, or $426.5 million, to $5.921 billion, and up $231.2 million, or 4.1%, above the budget forecast, according to Tuesday’s (July 2) revenue report from the Arkansas Department of Finance and Administration (DFA).

Gross tax revenue for fiscal year 2019, a broader economic indicator that includes collections from all available categories, totaled nearly $7.144 billion at the end of June, up 6.2% or $4.17.3 million compared to the same period in 2018 and 3.3% or $226.1 million above the budget forecast.

As a result of the strong year-end revenue tally, Arkansas produced a surplus above the maximum allocations available for distribution of $295.4 million going into fiscal 2020, which began on July 1. At the end of the 2019 legislation session, the Arkansas General Assembly endorsed Gov. Asa Hutchinson’s $5.75 billion budget with the overwhelming approval of the Revenue Stabilization Act.

“We are pleased to conclude Fiscal Year 2019 with a substantial surplus, the result of continued economic expansion which is demonstrated by the strong collections in individual and corporate income tax,” Hutchinson said in a statement. “Due to the surplus, more than $73 million is available as needed for transportation funding and ensures the state will fulfill its commitment under our short-term highway plan.

“As a result of a disciplined approach to spending and a growing economy, we enter next year with substantial reserve funds. The current budget surplus affirms that we are achieving the right balance in lowering taxes; supporting education and health care; and transforming state agencies in the delivery of services.”

Before the recent legislative session began in January, Gov. Hutchinson’s $5.75 billion budget request for fiscal 2020 reflected a 2.3% increase above the prior year’s allocation of $5.6 billion, which ended Sunday. The 2021 fiscal budget projections would rise another 2.3% to nearly $5.88 billion.

Under the RSA’s complex budget-balancing forecasting model, legislators must prioritize all state agency spending requests during both the fiscal and regular legislative session. The legislature usually divides state general revenues into “A”, “B”, and “C” categories under the RSA. Allocations in the “A” category have top priority and normally are 100% funded. If there is money left over after funding the “A” category, the “B” category is also funded, and eventually “C” category is funded if revenues allow. Following today’s year-end results, state budget officials said $64 million will be divided between the Restricted Reserve Fund and the Arkansas Highway Fund at a rate of 75% and 25%, respectively. The remainder of the $295.4 million budget surplus will be distributed between the General Revenue Allotment Reserve Fund and the state Highway transfer fund at the same 75-25 distribution ratio.

GROWTH FACTORS
Calling fiscal 2019 “a good year for Arkansas revenue,” DFA economist John Shelnutt attributed the state’s leftover revenue to three factors. First, continued growth in the state economy underpinned gains in personal income growth of 5.1% over the previous year and a pickup in consumer spending that was reflected in stronger sales tax collections in Retail and Accommodations and Food Services, which include the state’s fast-growing tourism and restaurant trades, said DFA’s chief economic forecaster.

The other factors were the one-time boost in state corporate and individual income tax collections, and strong corporate income tax results accelerated by the Trump administration’s $1.8 trillion business tax cut at the end of 2017.

“(That) boosted corporate income tax results across a majority of states including Arkansas with shifting tax strategy providing a side benefit to states,” said Shelnutt. “The gain … fiscal 2019 followed three years of decline in this category in Arkansas.”

Going into fiscal year 2020, however, Shelnutt said DFA forecasters have budgeted more conservatively “from the perspectives of a somewhat slower growth rate in the economy, less inflation, and exclusion of one-time factors from fiscal in the tax base.” He said the potential for significant refund requests or other adjustments in corporate tax filings is a concern after large estimated payments in the prior year.

INTERNET SALES
As the new fiscal year began, Arkansas joins the growing list of states to require internet vendors and out-of-state remote sellers that do not have a physical presence in Arkansas and annual sales of at least $100,000 to collect and remit Arkansas sales and use taxes. At the end of the 2017 session, similar legislation was rejected after a fierce debate on the Arkansas House floor.

However, the U.S. Supreme Court issued a ruling in late June 2018 in South Dakota v. Wayfair Inc., upholding that state’s requirement that large-scale online sellers without a physical “nexus” in the state must collect and remit sales and use taxes. Near the end of the 2019 session, Gov. Hutchinson signed Act 822 sponsored by Sen. Bart Hester, R-Cave Springs, as one of the last recommendations made by the bicameral Tax Reform and Relief Task Force to reform the state’s burdensome tax code.

The new law is expected to add up to $35.4 million to state budget coffers, including a $24.5 million spike in general revenue, according to DFA analysis. The remaining tax revenue collected from the so-called “internet tax” would be allocated to local municipalities and counties.

Among other things, the 33-page law cuts in half the monthly water fee imposed on most car washes, except for those that are coin-operated. During the session, the House Tax committee rejected an earlier version of the former SB 576 last Friday that would remove the exclusion on coin-operated car washes, and further levy a 6.5% water fee on all car washes in lieu of a sales and use tax.

Act 822 will also extend net operating losses (NOL) for Arkansas businesses from five to 10 years. Under former tax rules, business losses can only be offset against future earnings for up to five years. Arkansas State Chamber officials said the NOL change, if enacted into law, should reduce the risk of double taxation for businesses that go through up-and-down cycles.

The bill also adopts a single sales factor apportionment corporate tax model that would allow companies headquartered in Arkansas, particularly manufacturing, retail, wholesale, and banking entities, to shift part of their tax burden to out-of-state subsidiaries. Proponents of this change said it incentivizes in-state investment and job creation.

Lastly, the new legislation will decrease the corporate income tax rate from 6.5% to 5.9%.

OTHER TAX REVENUE SOURCES
Alcoholic beverages
July-June 2019: $60.5 million
July-June 2018: $59.4 million

Games of skill
July-June 2019: $69.7 million
July-June 2018: $64.5 million

Tobacco
July-June 2019: $212 million
July-June 2018: $219.9 million

Insurance
July-June 2019: $161.6 million
July-June 2018: $114.9 million