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State Capitol Week in Review from Senator Larry Teague

State Capitol Week in Review

From Senator Larry Teague

July 8, 2016

LITTLE ROCK –Arkansas state government ended its fiscal year with a surplus of $177 million.

When he announced the surplus, the governor said that he intended to propose further income tax reductions when the legislature convenes in regular session next January.

Last year the legislature enacted about $100 million a year in income tax cuts for the middle class. Those cuts are being phased in and are reflected only partially in the revenue report released by the Department of Finance and Administration last week.

The governor and legislative leaders expressed support for keeping as much of the $177 million surplus in reserve funds to use for emergencies and to plug holes in agency budgets if the economy turns bad.

Earlier this year the legislature approved the governor’s plan to fund highway construction in part by transferring 25 percent of future budget surpluses to the Highway and Transportation Department. That transfer of surplus revenue for highways will begin in Fiscal Year 2017, which began on July 1, and it will not apply to the $177 million surplus from unbudgeted revenue collected in Fiscal Year 2016, which ended on June 30.

The fiscal report reflects state tax collections that make up the general revenue fund and then is distributed to state agencies, public schools, institutions of higher education. The major sources of general revenue are sales taxes and income taxes paid by individuals and corporations.

General revenues are distinct from special revenues, which are specific taxes collected for specific purposes. A good example of special revenue is motor fuels taxes collected at the gas pump. Those revenues pay for construction and maintenance of highways and bridges.

Before tax collections are put into the general revenue fund, certain obligations are paid. They include income tax refunds, debt service on college savings bonds, court-ordered payments from lawsuits and valid claims against the state.

After those “off the top” expenditures were paid last fiscal year, the net general revenue available for state agencies and schools amounted to about $5.37 billion. That amount is $117 more than the previous year, an increase of 2.2 percent. The increase represents growth in economic activity in Arkansas because tax rates were not raised.

Increased buying by consumers and businesses was a significant factor in the growth of the state general revenue fund. Sales taxes grew by $92 million over the previous year, an increase of 4.2 percent.

Revenue from the sales tax would have been greater but the state settled a lawsuit challenging its collection of the tax on sand used in hydraulic fracturing, which was paid by companies in natural gas production. The settlement reduced sales tax revenue by $28.7 million.

About 44 percent of the general revenue fund will go to public schools and another 14 percent for higher education. About 27 percent will be spent on health and human services and eight percent will go for prisons, which includes parole and probation. About seven percent will go to numerous smaller agencies and local governments.

The legislature will begin budget hearings in October in preparation for the 2017 regular session. In November the governor will present an updated budget forecast.

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