State cuts forecast for 2021 revenue citing projected recession

LITTLE ROCK — Gov. Asa Hutchinson’s administration on Thursday cut its forecast for net general revenue available to state agencies in fiscal 2021 by nearly $206 million to $5.68 billion, citing a projected economic recession triggered by the coronavirus pandemic.

“The revised revenue forecast for next year reflects the new reality of dramatically reduced business activity and revenues to the state,” Hutchinson said.

“The revised forecast for next year demonstrates that we will need to tighten our state budget in a number of areas and reduce spending in a number of areas,” the governor said.

Hutchinson said he hopes when the current health emergency is over, the state’s economy will rebound quickly.

The state Department of Finance and Administration’s cut Thursday in the forecast for 2021 came a week and a half after the department cut the general revenue budget for 2020 by $353.1 million, to $5.38 billion, because of economic changes brought about by the pandemic.

Fiscal 2021 starts July 1. The 2021 budget is to be considered in a legislative session set to start Wednesday.

PANDEMIC IMPACT

Hutchinson has attributed the 2020 budget cut to an expected reduction in tax collection plus the extension of the state individual income tax filing and payment deadline from April 15 to July 15. The latter, keeping the state’s deadline in sync with the federal government’s extension of those deadlines, means the state will receive that revenue in fiscal 2021.

On March 4, the governor proposed a general revenue budget of $5.83 billion for 2021 and setting aside $54 million in surplus money.

By comparison, the 2019 totaled $5.62 billion, according to Scott Hardin, a spokesman for the Finance Department.

General revenue helps finance state-supported programs, such as public schools, human services programs, prisons, the state police and public two- and four-year colleges. The states’ two largest sources of general revenue are individual income and sales and use taxes.

The Finance Department’s cut in the 2021 forecast sets the stage for lawmakers and Hutchinson in the coming session to negotiate a budget and determine which programs get the top priority.

Priorities are set in the Revenue Stabilization Act. The goal of the act is to prevent deficit spending.

Larry Walther, finance and administration secretary, said Thursday the $205.9 million 2021 cut in a letter to the Legislative Council co-chairmen.

“This revision is necessary because of economic recession predicted as a result of impact from business slowdown and negative labor market effects over much of [fiscal year] 2021,” Walther wrote to Sen. Cecile Bledsoe, R-Rogers, and Rep. Jeff Wardlaw, R-Hermitage.

“These extraordinary impacts were not in the prior forecast used in budget recommendations for the fiscal session. The Governor’s announced shifting of tax filing and payment deadlines to early [fiscal year] 2021 partly offset the effects of economic recession,” Walther said in his letter.

John Shelnutt, the state’s chief economic forecaster, said Thursday the coronavirus is expected to trigger a recession in Arkansas that’s also national and international in scope.

“We are assuming [the recession will last through] all of this calendar year that we’re in,” he said.

“Some aspects of it would continue on all the way to the middle of 2021, which would cover most of our fiscal year 2021, depending on which indicators you are looking at,” Shelnutt said.

The department on Thursday also cut its forecast for total revenue in 2021 by $369.6 million to $6.89 billion.

Its revised forecast for 2020 totals $6.69 billion.

By comparison, in 2019, the state collected $7.14 billion in total revenue.

For 2021, the department cut its projection for income tax collection by $330 million to $3.35 billion, and trimmed its projection for sales and use tax collection by $80 million to $2.56 billion.

However, it increased its projection for corporate income tax collection $43.9 million, to $449.4 million.

The state has other sources of general revenue ranging from taxes on tobacco to insurance to casino gambling.

Act 182 of 2019 enacted Hutchinson’s plan to cut the state’s top income tax rate from 6.9% to 6.6% on Jan. 1 and will reduce the rate again to 5.9% on Jan. 1. State officials projected that would reduce revenue $25.6 million in 2020, $48.5 million in 2021 and another $22.9 million in 2022.

In 2015 and 2017, the Legislature enacted Hutchinson’s tax cuts for middle- and lower-income Arkansans. State officials projected those cuts would together reduce revenue about $150 million a year.

Sen. Larry Teague, D-Nashville, a co-chairman of the Legislature’s Joint Budget Committee, said the department’s 2021 cut “was the right thing to do, although revenue was OK in March.”

March’s general revenue collection largely reflected taxes paid to the state last month, based on income earned and consumers’ purchases in February and before the outbreak of coronavirus in Arkansas.

Teague said he doesn’t know whether Hutchinson’s administration should have made a deeper cut in the forecast for 2021.

“I give him the benefit of the doubt,” he added.

The committee’s other co-chairman, Rep. Lane Jean, R-Magnolia, said, “That’s probably not a bad place to start.

“I think it is just too early to tell how much it is going to hit the economy,” he said, adding, “I think it’s going to be really bad.”

Jean and Teague said the reduction for 2021 could make negotiation more difficult between lawmakers and the governor on the proposed Revenue Stabilization Act.