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Forecasting for Effect (Hunter Field Editor’s Note)

Hunter Field Editor's Note
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Our state Legislature recently met in special session, primarily to cut taxes.

The General Assembly cut Arkansas’ top individual income tax rate from 4.4% to 3.9% and the top corporate rate from 4.8% to 4.3%.

This isn’t a column about whether these policy decisions were wise; it’s about some frustration with how we got here.

If you’re wondering, I’d keep the corporate tax cut, but I’d have preferred a more targeted approach to individual income tax relief.

Having covered the Legislature and the state budget, I see that the special session brought out a quirk in the budget that has long been a frustration: how state forecasters consistently undershoot revenue projections.

It has been that way for some time, but has really ramped up in recent years.

The state’s surplus during the last four fiscal years:

2021 — $946 million.

2022 — $1.6 billion.

2023 — $1.2 billion.

2024 — $708 million (projected; the fiscal year ended June 30).

There are really only two explanations. Forecasters either aren’t very good at forecasting, or they’re doing this intentionally.

I suspect they’d say they’re being conservative. In private business, we call that sandbagging.

Now, I should note that portions of these surpluses were budgeted for reserve funds for state savings and for future capital projects. For example, the 2024 budget had a built-in surplus of $391 million, and that was before budget officials accounted for revenue lost due to tax cuts enacted in 2023. Still, we’re on pace to exceed expected revenue by about 5%.

This is far, far better than Congress’ deficit spending, but it is an area where the state would be wise to emulate private business.

I know it looks flashy to have these huge, unbudgeted surpluses, but it isn’t the best way to run an organization. You should want an accurate, complete fiscal picture as you approach each year’s budget. It gives you concrete targets and goals for revenue collections. Better revenue projections would also give policymakers a better idea of how much money the state is likely to bring in during a given year versus what it needs to spend to operate.

In the long run, more accurate forecasting could actually save taxpayers money because lawmakers might feel better about cutting taxes in the first half of each year during regular sessions rather than waiting on updated forecasts to enact tax legislation during what have now become annual special sessions, which are expensive to hold.

In the days after this column is published, the state will release its final revenue numbers for fiscal 2024. If history is a guide, the surplus will be even higher than projections.

Regardless of how we got there, that’s good news. Hopefully, the trend holds as the influx of federal pandemic relief goes away.

Email Hunter Field, editor of Arkansas Business, at hfield@abpg.com
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