State budget coffers boosted by robust income tax collections in September

Three months into fiscal 2020, Arkansas budget coffers were overflowing in September as individual and corporate income tax collections pushed revenues available for state government use well above expectations.

The Arkansas Department of Finance and Administration (DFA) reported Wednesday (Oct. 2) that year-to-date (July–September) net available revenues grew by 2.9%, or $42.9 million, to nearly $1.516 billion from a year ago, and 2.6%, or $38.9 million, when compared with the state’s official budget forecast. Gross tax revenue for fiscal year 2019, a key economic indicator that includes collections from all available categories, totaled nearly $1.693 billion at the end of September, a gain of 2.2% or $36.8 million when compared to year ago levels and 1.9% or $32.4 million above the DF&A forecast.

“It was a good month for state revenue collections,” DF&A economist John Shelnutt said of the near across-the-board gains in all major revenue categories through the first quarter of fiscal 2020.

In fiscal 2019 ended June 30, Arkansas produced a surplus above the maximum allocations available for distribution of $295.4 million. 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. Before the 2019 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. The 2021 fiscal budget projections would rise another 2.3% to nearly $5.88 billion.

As the new fiscal year gets underway, Arkansas also 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.

Last June, the U.S. Supreme Court handed down a landmark decision in South Dakota v. Wayfair, eliminating the requirement that businesses must be physically present in a state before their sales can be taxed and granting states the ability to collect taxes from out-of-state internet retailers. Shortly after the high court decision, DF&A attempted to determine the fiscal impact of potential increased collections of Arkansas sales and use taxes before the 2019 legislation session began.

During debate over tax policy during the session, DF&A officials provided fiscal impact estimates for increased revenues from the U.S. Government Accountability Office that ranged from $21.7 million to nearly $50 million. Gov. Hutchinson signed Act 822 sponsored by Sen. Bart Hester, R-Cave Springs, as one of the last recommendations in the session 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 DF&A analysis. The remaining tax revenue collected from the so-called “internet tax” would be allocated to local municipalities and counties.

Shelnutt, who serves as chief economist for DFA’s Office of Economic Analysis and Tax Research, said individual and corporate income collections accounted for most of the gain above forecast in September, adding that payroll withholding tax is a large component of individual income tax collections and “a window onto the state of the economy.”

“That category showed 4.8% growth year-over-year in September and 4.7% over the last two months,” said the DF&A forecaster.

One-time factors in collections and processing also benefitted corporate income tax collections during the month, although it would have still been a large gain without it, said Shelnutt. Another one-time factor in sales tax collections pulled results lower, resulting in this category falling slightly below forecast.

“Notably, the motor vehicle portion of Sales Tax collections was up 11% year-over-year in September reflecting consumer confidence in committing to big-ticket purchases,” said Shelnutt. “This category of collections is volatile in monthly reports, however.”

Lastly, individual refunds were less than expected, which has the effect of adding to net revenue results and further boosted the amount above forecast by $5.4 million. DF&A also has begun posting tax collection receipts from gaming and racing venues in fiscal 2020, which totaled $11.4 million in September.

Shelnutt said gaming revenue was $300,000 above forecast, which allows for an approximately 50% revenue reduction to state general revenue for gaming as a result of the Casino Amendment changes to gaming tax rate overall and distribution of the tax receipts among state-local fund categories.

“Actual gaming revenue collections for general revenue in September were down 53.4%, mainly as a result of the law changes,” he said.

Through September, net available general revenues in September totaled $604 million, which is a strong 6.1% or $34.5 million above year-ago levels and $31.4 million, or 5.5% above forecast.

Year-to-date individual income tax collections rose by $32.1 million or 4.2% to $799.1 million compared to a year ago and beat the state’s forecast by 2%, or $15.7 million. Individual income tax collections for the month rose by $23.7 million, or 7.5% to $337.7 million, which was also $11 million or 3.4% above forecast.

Sales and use tax collections through the first three months of fiscal 2020 rose by 1.4% to $638 million from a year ago. However, that total is slightly below forecast by $4.6 million or 0.7%. September sales and use tax collections were mostly flat at $209.5 million, up $1 million or 0.5%. Compared to the monthly forecast, collections were down 1.9% or $4.1 million.

For the year, corporate income tax collections totaled $117.3 million, down $500,000 from a year ago, but well above forecast at by 15.7% or $15.9 million. Corporate income tax collections through September also rose by $7.7 million to $88.1 million following a light month of business activity in the previous month. That pushed revenues well above the state’s forecast by a robust 24.8% or $17.5 million.

OTHER TAX REVENUE SOURCES

Alcoholic beverages
July-September 2020: $15.7 million
July-September 2019: $15 million

Gaming
July-September 2020: $11 million
July-September 2019: $16.7 million

Tobacco
July-September 2020: $56.5 million
July-September 2019: $54.9 million

Insurance
July-September 2020: $21.5 million
July-September 2019: $21.5 million