Governor Mike Beebe announced today that he had “accepted a recommendation by the Arkansas Department of Finance and Administration to cut the state budget by $100 million for the current fiscal year.” This amounts to a budget reduction of just over 2 percent. The background to this announcement was a report from the Department of Finance and Administration (DF&A) earlier this month that showed that Arkansas tax revenues were sharply lower than expected in the first quarter of fiscal year 2010 (July-Sept 2009).
Year-to-date gross general revenues were down by 7.2 percent from the previous year, and were 6.4 percent below the general revenue forecast. Net available general revenues were down 3.3 percent from the previous year and 7.1 percent below forecast. The report noted that “in percentage terms Corporate Income is below forecast the most (-22.1 percent [-$19.9 million]), but Gross Receipts [sales taxes] are down by a greater amount in dollar terms (-$61.6 million [-10.8 percent]).”
These declines are disconcerting, especially in the context of recent signs of renewed growth in the Arkansas economy. However, there are reasons to believe that this is a temporary problem and that state revenues will recover sufficiently to meet revised revenue projections in the latter part of the fiscal year.
- First, tax revenues are recorded by DF&A in the month that they were received, rather than in the month that the tax liabilities were incurred. Reporting and payment lags mean that revenues received in the July-September period reflect economic conditions earlier in the year when the recession was having a greater impact on the economy. Recent signs of stabilization should show through to revenue receipts in coming months.
- More important, as the economy recovers from the recession in coming months, economic activity will pick up — further expanding the tax base and revenue receipts.
The depth of the nationwide recession and its impact on the Arkansas economy were more severe than anticipated. Consequently, state revenues will be lower than earlier expected. With prospects of an improving economy on the horizon, however, a modest 2 percent reduction in annual revenue projections and budgetary authority should be sufficient to correct the state’s budget imbalances. As Governor Beebe put it, “Just like any family or business, state government must live within its means.” His response to unexpectedly sharp declines in revenue is a prudent fiscal adjustment.