A year ago the financial outlook for Arkansas was pessimistic, but local officials are grateful that the proposed tax cliffs have been overstated.
At the start of the pandemic last April, businesses were hit by closings. The Arkansas unemployment rate was 10% higher than the peak of the last recession in 2008-2009 and its highest since April 1983, according to the Bureau of Labor Statistics.
Revenue was impacted when the General Assembly approved a budget of $ 5.89 billion, of which $ 212 million was not funded.
As with much of the country, Arkansas’s financial outlook was dire, but now, a year later, local and state tax revenues have surpassed forecasters’ predictions.
A March sales report for Arkansas showed the state’s gross collection for that fiscal year, which began July 1, was 11.3% above forecast. Income, sales, and corporate taxes were all above forecasters’ forecasts.
“Fiscal ’21 is doing better along with many other states,” said John Shelnutt, economic analysis and tax research administrator for the Arkansas Department of Finance and Administration. “I think they just misjudged the nature of this downturn and the nature of the upturn.”
Since the unemployment rate rose to 10%, it has steadily declined to 4.5% in February, the lowest level since the pandemic began.
For fiscal 2021, Arkansas income tax revenue rose 7.3%, beating projections by 12%, according to the Treasury Department.
Sales tax revenues also rose – a trend attributable to the state’s online sales tax law enacted by law in 2019.
With many people working from home, spending patterns have not changed. While people were less likely to travel to retail stores, online shopping increased, offsetting potential losses in sales tax revenue.
For cities and municipalities, sales taxes are the main source of income for many municipal budgets. With businesses closing, many forecast cities would experience a huge drop in sales, said Mark Hayes, executive director of the Arkansas Municipal League.
“I was very concerned that local businesses weren’t getting nearly as much traction as it was going to affect the bottom line of the city,” said Hayes. “As fate would have it, the online sales tax has mitigated this somewhat.”
Even in the tourism-dependent hot springs, sales tax revenues rose 5.23% year over year, according to a February report from the city. The report said online sales taxes “stabilized our revenue streams” and offset losses in the hospitality and retail sectors.
“I think sales tax was hurt by the wise decision by lawmakers in the last session to introduce Internet sales tax,” said Chris Villines, executive director of the Association of Arkansas Counties. “A lot of people who have moved home are still paying sales tax on the same items they would have brought to Walmart and given.”
However, the damage to brick-and-mortar retail could have a lasting impact on property tax revenues and the economy.
Chris Moses, president and CEO of real estate company Newmark Moses Tucker Partners, said his company needed to borrow money to meet its obligations as many of the company’s commercial tenants were unable to pay their rents during the pandemic.
While property tax revenues in Pulaski County have remained stable during the pandemic, the future of retail and commercial real estate could lead to problems later, Moses said.
“Across the pandemic, I would say that for our company alone, 80% of our retail tenants have asked for reductions and concessions,” said Moses. “And their inability to pay the agreed lease payments has created problems with overall property values.”