Week In Review

State Capitol Week in Review

            LITTLE ROCK – The Arkansas economy is rebounding modestly, according to finance officials who recently upgraded the budget forecast for state government.

            The administration rarely changes its official forecast for state government revenue.  Before the change made on May 1, it had been November since finance officials revised their estimate of state revenues.  They adjust revenue estimates so that state agencies and institutions of higher education can more accurately plan their budgets.

            Upward changes in the forecast reflect growth in the state’s economic activity, because tax rates remain constant.  Therefore, any growth in revenue is due to growth in the economy and not to higher taxes.

            Net revenues will increase by 2.4 percent this fiscal year, which ends on June 30.  That compares to growth of 3.9 percent in net revenues last year and estimated growth of 1.9 percent next year.

            Forecasts for the U.S. and the Arkansas economies “indicate continued slow economic recovery and subdued inflation,” according to a letter from the director of the Department of Finance and Administration to the Senate and House chairmen of the Joint Budget Committee.

            Arkansas experienced moderate job growth in the private sector over the past year, with additional gains expected in the near future, the letter said. However, the near-term outlook still holds “significant risk of faltering,” it said.

            The letter quotes worldwide analyses that predict continued low inflation, continued low interest rates and falling average energy prices.  One potential drag on the American economy will be continued weakness in Europe.

            The success of economic recovery in Arkansas will depend heavily on a rebound in construction and manufacturing, which suffered in the recent downturn.  Also, potential growth in the steel and metals industry could boost a recover, as could gains in the transportation industry.

            The major sources of the state’s general revenue fund are individual income taxes and sales taxes.  The third largest source is corporate income taxes. Taxes on alcoholic beverages rank fourth, while taxes on tobacco and insurance products are the fifth and sixth greatest sources of state general revenue. Taxes on games of skill rank seventh, and severance taxes on gas, oil and other natural resources are eighth.

            General revenue is the single largest discretionary fund controlled by the state legislature. The state has other sources of revenue, the largest of which are federal matching funds and special revenues.  Federal matching funds have plenty of strings attached, so the state legislature has relatively little control over how they are spent.  The U.S. Congress in Washington determines how they are spent.

            Special revenues are dedicated taxes for specific purposes, such as motor fuels taxes that are spent on highway maintenance and construction.

            Last fiscal year state net general revenue was $4.8 billion.  When this fiscal year ends on June 30 it is projected to be $4.9 billion. Next year it is projected to be $5 billion.

            Last year the state had a surplus of $146 million.  This year the surplus will be an estimated $138 million.  According to the most recent forecast the surplus next year will be $14 million.  A major reason for the reduction in the size of the surplus is that the legislature enacted a package of tax cuts earlier this year, and they will begin taking effect next year.