Revenue misses forecast, but grows $6.1 million

BYLINE: BY MICHAEL R. WICKLINE ARKANSAS DEMOCRAT-GAZETTE

In December, for the first time since February 2004, the state's monthly gross general revenue collections fell below the state forecast.

After that news Wednesday from the Department of Finance and Administration, Gov.-elect Mike Beebe said he still believes the state "must press forward with offering Arkansans relevant, permanent tax relief in the form of eliminating the state sales tax on groceries." Curbing the grocery tax was a central theme of his campaign for governor. He takes office Tuesday.

But Beebe also saw in the news evidence that "we have to do so in a responsible manner, namely through a phaseout," rather than removing the entire tax at once. "By eliminating the tax with a phaseout, we can get rid of it without putting state services in jeopardy in case of economic downturns," Beebe said.

He so far has not pinned himself down to a particular approach to disposing of the tax on groceries but has said he "hopes" that "perhaps" half could be done away with in the legislative session that begins Monday.

Beebe spokesman Zac Wright said phasing out the state sales tax on energy used by manufacturers also remains a priority for Beebe. December's collections - $427.4 million - lagged $3.8 million (0.9 percent) behind the forecast for the month.

But the sum still was $6.1 million (1.4 percent) more than in December 2005.

The state's net general revenue for December totaled $385.9 million. That was an increase of $5.1 million (1.3 percent) over December 2005 and $8 million (2 percent) more than the forecast.

The net is what's left for agencies to spend after the state makes up to 11 off-the-top subtractions from the gross. Those subtractions are paid out as tax refunds, financing for state bond programs, contributions to public school appropriations, payments in school desegregation cases, and for other things.

With lawmakers preparing to convene in five days, the department projects that a surplus of $843 million will have accumulated - from several years - by June 30. This assumes some or all of the surplus won't be spent before June 30. The forthcoming legislative session could authorize the spending of at least some of it, diminishing the amount that would be left June 30.

Department Director Richard Weiss called the December report "a mixed bag." Corporate income tax collections declined, the growth of sales tax collections slowed, and individual income tax collections remained strong.

"We have clearly indicated we are going to be slowing down, and I think this is consistent with that forecast," he said.

Weiss said he remains confident with the department's $843 million surplus projection.

As of Dec. 5, $477.5 million of the projected surplus was in the bank, said Mike Stormes, the state's budget administrator.

TAX OPTIONS

The surplus has fueled debate in legislative circles about whether to cut taxes, which ones to cut, and how much to cut them.

However, at the same time, the state Supreme Court is reviewing whether the Legislature is providing adequate and equitable education funding to the state's 450,000 public school students.

Departing Gov. Mike Huckabee, a Republican, said the state's economy "is excellent." He said he hopes the Legislature will "offer real tax relief since they have a record surplus." The December report shows it's important that the Legislature be cautious about increasing state agencies' budgets, legislative leaders said Wednesday.

"We have been on high times in government, and we always have to be prepared for a slowdown," said House Speaker-designate Benny Petrus, D-Stuttgart.

Sen. Jim Hill, D-Nashville, said he's "not alarmed" by December's tax collections but that lawmakers "are going to be very cautious in increasing agency budgets and very cautious in doing anything that costs money over time. I think this little downturn illustrates why we need to do that, but maybe it won't be a trend." Legislative leaders are not united around the idea of cutting the grocery tax.

Petrus said he would like to see tax relief targeted more to low-income individuals. He mentioned, for examples, creating an earned income tax credit, a tax rebate or changing income tax brackets. An earned income tax credit is a way to give a tax break to members of low-income families who work.

The sales tax on groceries paid by high-income individuals could be used to promote economic development by reducing the sales tax on energy paid by manufacturers and for a tax credit for biodiesel plants, Petrus said.

Hill, the incoming chairman of the Senate Revenue and Taxation Committee, said that in September he sensed a mood in the Legislature supporting a significant cut in the sales tax on groceries.

"Now, Mr. Petrus has decided he might not like it," Hill said. "That is too bad. That might make it less possible to pass. That sure doesn't help its chances." Petrus said he hasn't ruled out supporting a phaseout of the grocery tax.

"I just want to have the debate out there. I support the concept of removing the sales tax on groceries. I don't believe 100 percent of the people need 100 percent of the break," he said. "You are going to see alternative plans and we just vote them up or vote them down." One of Petrus' right-hand men, Rep. Keven Anderson, a Republican from Rogers, said phasing out the state sales tax on groceries is "not on the top of my list if I had to pick and choose." "If it's the only tax break to vote for at the end of the day then I think I am for it," said Anderson, a member of the House Revenue and Taxation Committee. He said he favors targeting tax cuts toward the poor and to promote economic development.

DECEMBER DETAILS

According to the finance department's report, December's general revenue included: $183.7 million in gross receipts (which are primarily sales and use taxes), up $5.3 million (3 percent) over December 2005 and $1.8 million (1 percent) below the forecast.

$175 million in individual income tax, an increase of $11.7 million (7.2 percent) over December 2005 and $4.3 million (2.5 percent) above the forecast. The large increase in collections is due to high growth in withholding payments.

$52.3 million in corporate income tax, a decrease of $10.4 million (16.6 percent) over December 2005 and $5.5 million (9.5 percent) below the forecast.

Weiss said corporate income taxes are driven by corporations' federal tax strategies, which are difficult to predict. He said growth of the state's gross receipts has slowed partly because businesses' spending on software and other things has slowed.

YEAR TO DATE

For the first six months of this fiscal year, gross general revenue totaled $2.48 billion. That's an increase of $132.5 million (5.6 percent) over the same period last fiscal year and $1.7 million (0.1 percent) below the forecast.

For those months, the net is $2.18 billion, an increase of $140.9 million (6.9 percent) and $2.3 million (0.1 percent) below the forecast.

NATIONAL PICTURE

The growth in tax collections also is slowing in many other states, according to the National Conference of State Legislatures.

"Although overall revenue performance has been stronger than expected, many states are starting to see individual tax categories performing below expectations," the conference said in a recent report.

The sales tax, which accounts for about one-third of states' tax collections, is showing signs of weakness in many states, the conference's report said. However, the corporate income tax is performing strongly in nearly half the states, although the tax represents only about 6 percent of state tax collections on average, the report said.

This article was published 01/04/2007