Fiscal session unlikely to cut income taxes

Legislative leaders waiting for end-of-fiscal-year data

Arkansas legislative leaders said they expect to wait until after the end of the current fiscal year on June 30 before considering the possibility of enacting more income tax cuts in a special session later this year or in the 2025 regular session.

House Speaker Matthew Shepherd, R-El Dorado, said Friday, “I think initially, probably back in the fall … I may have even given statements to the effect that maybe around fiscal session something could happen.”

The General Assembly’s fiscal session will begin April 10.

“I think that the feeling just among the executive branch and leadership on both ends [in the House and the Senate] is we can take some more time [and] take a look, as we always try to be very smart and pragmatic about how we approach these things,” Shepherd said in an interview.

“I would imagine as we approach the end of the fiscal year and move into the next one I think that’s when you will see the renewed discussion, and I believe we will have the opportunity to provide some additional tax relief,” he said.

When asked whether he expected the Legislature to consider enacting additional tax relief later this year in a special session or during the 2025 regular session, he said, “Right now, I am thinking later this year. That is what I anticipate at this point.”

Sen. Jonathan Dismang, R-Searcy, said Wednesday in an interview that he wants to see how the state’s general revenue tax collections shake out and wait until later this year or until the 2025 regular session to consider enacting more income tax cuts, which could be made effective retroactively.

“There is a commitment to continue to reduce the income tax,” said Dismang, who is co-chairman of the Joint Budget Committee. “No one needs to be concerned about that. It’s just maybe the timing. We have got some latitude and time.”

State Rep. Lane Jean, R-Magnolia, said Thursday in an interview there will be “no tax cuts in the fiscal session,” and the Legislature will potentially meet in a special session this fall to consider more income tax cuts.

“It gives just a few more months of seeing if the decline [in state general reve

nue collections] is continuing, which I suspect it will be, and how much [tax cuts] we can give without getting into a budget crisis,” said Jean, who is a co-chairman of the Joint Budget Committee.

So far in fiscal year 2024, state general revenue collections have dipped from the previous fiscal year largely as a result of the income and corporate income tax cuts and slower growth in tax collections.

State Rep. David Ray, R-Maumelle, said Friday in a written statement, “Especially as inflation persists and families struggle with affordability in food, fuel, and housing, it’s imperative that we continue to lower income taxes every time our revenue situation will allow.

“After speaking with other legislators, I’m comfortable waiting until the end of the fiscal year when our 2023 tax cuts are fully phased in to decide when and how to best reduce the income tax going forward. This will give us a more complete picture of our revenue situation,” he said.

Asked whether Gov. Sarah Huckabee Sanders plans to call a special session later this year after the end of fiscal year 2024 to consider legislation cutting income tax rates or has made no decision regarding that, Sanders spokesperson Alexa Henning said Wednesday in a written statement: “The Governor is proud to have cut income taxes not once, but twice, over the last year.

“She will continue to work with the legislature to look for every opportunity to responsibly phase out the state income tax,” Henning said.

Sanders made no mention of income tax cuts in her letter Wednesday to Dismang and Jean about her proposed general revenue budget for fiscal year 2025 that will be considered in the fiscal session. Fiscal year 2025 begins July 1 and ends June 30, 2025.

Sanders proposed increasing state government’s general revenue budget by $109.3 million to $6.31 billion in fiscal 2025, with most of the increased funding allocated to the state’s public school fund and the state’s Education Freedom Account program to help students attend private school, parochial school or home school.

The Republican governor noted the proposed 1.76% increase in the general revenue budget for fiscal year 2025 is far below the 3% annual increase the state has averaged in recent years.

The governor’s proposed budget projects a general revenue surplus of $376.6 million in fiscal 2025 if the state’s general revenue meets the Department of Finance and Administration’s latest forecast of $6.68 billion for net general revenue in fiscal 2025.

The finance department projects a $240.5 million general revenue surplus in fiscal year 2024 that ends June 30.

During the 2023 regular session, the General Assembly and Gov. Sanders authorized a $177.7 million increase in the state’s general revenue budget to $6.2 billion in fiscal 2024, with most of the increase allocated to education and corrections programs.

During the first eight months of fiscal 2024, the state’s total general revenue collections have declined by $113 million, or 2%, from the same period in fiscal 2023 to $5.41 billion, but exceeded the state’s Feb. 1 forecast by $25.3 million, or 0.5%.

Tax refunds and some special government expenditures are taken off the top of total general revenue collections, leaving a net amount that state agencies are allowed to spend up to the maximum authorized by the state’s Revenue Stabilization Act. That act distributes general revenue to state-supported programs such as public schools, the state’s universities and colleges, human service programs, and prisons and other corrections programs.

During the first eight months of fiscal 2024, the state’s net general revenue had dipped by $323.1 million, or 6.8%, from the same period in fiscal 2024 to $4.41 billion, but beat the state’s Feb. 1 forecast by $10.6 million, or 0.2%.

The state’s Feb. 1 forecast projects a general revenue surplus of $240.5 million at the end of fiscal year 2024.

In its May 17 general revenue forecast, the finance department initially projected a $423.3 million general revenue surplus at the end of fiscal 2024. After income tax cuts enacted by the Legislature and Sanders during the Sept. 11-14 special session, finance department officials said at that time the projected surplus was reduced to about $174 million in fiscal 2024.

Act 6 of the special session cut the state’s top individual income tax rate from 4.7% to 4.4% and the state’s top corporate income tax rate from 5.1% to 4.8%, starting in tax year 2024, according to the finance department.

Cutting the state’s top individual income tax rate from 4.7% to 4.4%, effective Jan. 1, 2024, is projected by the finance department to reduce state general revenue by $75 million in fiscal 2024 and by $150 million in fiscal 2025. Trimming the state’s top corporate income tax rate from 5.1% to 4.8%, effective Jan. 1, 2024, is projected to reduce state general revenue by $17.2 million in fiscal 2024 and by $34.5 million in fiscal 2025.

The finance department has projected the temporary income tax credit will reduce state general revenue by $156.3 million in fiscal 2024.

Shepherd said Friday the way the last round of income tax cuts was put into effect “the more time we have, the more we are able to get a truer picture of where we are, and so every day that passes and every month that goes by we have additional information where we are at from a revenue standpoint.”

“I think everything is pointing to the fact that we can continue to provide some additional income tax relief, but as a practical matter it is not going to make a big difference whether we were to do something today, two months from now or three months from now because we are always able to address how we implement it and when it [is effective],” he said.

In April 2023, Sanders signed a bill into law as Act 532 that cut the state’s top individual income tax rate from 4.9% to 4.7% and the state’s top corporate income tax rate from 5.3% to 5.1%, retroactive to Jan. 1, 2023. That law was projected by the finance department to reduce state general revenue by $186 million in fiscal 2024 and $124 million in fiscal 2025.

In April 2023, Sanders also signed a bill into law as Act 485 to gradually phase out the “throwback rule” on income of multistate corporations over a seven-year period, starting in the tax year starting on or after Jan. 1, 2024, and be complete in tax year 2030.

That law is projected by the finance department to reduce general revenue by $10.6 million in fiscal year 2024 and ultimately reduce general revenue by $74 million a year in fiscal year 2030 and thereafter.