Arkansas ends FY23 with $1.16 billion surplus thanks to strong economy, conservative forecasting

This story was last updated at 2:55 p.m. on Wednesday, July 5, 2023.

Arkansas ended the fiscal year last week with a $1.161 billion budget surplus, the second largest in state history, finance officials announced Wednesday.

The surplus comes a year after Arkansas’ record $1.628 billion surplus in fiscal 2022 that led to a special legislative session to implement and accelerate tax cuts. 

A combination of factors, including conservative forecasting and strong growth in sales and income tax collections, contributed to the state taking in more than a billion dollars than it spent in the fiscal year that ended Friday. 

“Strong economic growth accounted for Fiscal Year 2023 ending with a $1.16 billion surplus,” said Larry Walther, secretary of the Arkansas Department of Finance and Administration. “The economy outperformed expectations across the fiscal year in revenue results amid volatility from slowing inflation, tax reductions and tight labor markets.”

It was the third consecutive year of record surpluses. Prior to the last three fiscal years, the largest surplus in state history was $409.3 million in Fiscal Year 2007.

The state collected more than $8.8 billion over the last year — $76.9 million more than fiscal 2022 and 1.7% above forecast.

After tax refunds and some dedicated expenses, $7.1 billion in “general revenue” was left for the governor and Legislature to fund state government. State leaders budgeted $6.02 billion for fiscal 2023 and $6.2 billion for fiscal 2024, which began Saturday.

The full revenue report is available here.

Implications

On the day the year-end revenue report was released in 2022, then-Gov. Asa Hutchinson immediately announced plans to call a special session to cut taxes, saying the large surplus showed the state was collecting too much in taxes.

In an August special session, the General assembly implemented a tax relief package that accelerated several previously enacted tax cut measures and created a one-time “inflationary relief” tax credit.

Arkansas income tax rate changes explained

Budget officials projected at the time that the cuts would reduce state revenues by more than $500 million in fiscal 2023. 

The Finance Department said Wednesday there has been “less decline in income tax categories than expected” from these and other income tax cuts implemented over the last decade.

In this year’s regular session, the Legislature enacted additional tax cuts, including slashing the state’s top income tax rate for individuals from 4.9% to 4.7% and for businesses from 5.3% to 5.1%.

The income tax cuts are expected to reduce state general revenue by $186 million in fiscal 2024 and $124 million in fiscal 2025.

The Legislature and Gov. Sarah Huckabee Sanders also set aside more than $380 million in surplus funds for a handful of special projects, the largest being expansion of the state’s prison capacity. 

The fiscal 2023 surplus will be welcome news for Republican lawmakers and Sanders, who have expressed interest in further reducing state income taxes with the goal of eventually eliminating income tax in Arkansas. 

“The Governor promised and delivered on cutting taxes so Arkansans would see more of their paycheck and the state would remain competitive in attracting businesses and more jobs,” Sanders’ Communications Director Alexa Henning said. “She will continue working to responsibly phase out the state income tax and being financially sound and strong helps keep us moving in that direction.”

Revenue report highlights

Individual Income Taxes: Fiscal year 2023 individual income tax collections total $3,915.9 million, $255.6 million or -6.1 percent below FY 2022 collections and $42.4 million or 1.1 percent above forecast.

Corporate Income Taxes: Fiscal year corporate collections total $842.5 million, an increase of $5.3 million or 0.6 percent above FY 2022. Collections came in $51.8 million or 6.5 percent above forecast.

Sales and Use Collections: Fiscal year 2023 Sales and Use tax collections total $3,418.4 million, an increase of $263.6 million or 8.4 percent over FY 2022 and $34.1 million or 1.0 percent above forecast.

Refunds: Individual income tax refunds total $768.1 million, $314.6 million or 69.3 percent above last year and $36.8 million or 5.0 percent above forecast. Amounts above forecast in refund categories subtract from net general revenue results.

Corporate income tax refunds total $60.4 million, $8.0 million or 15.2 percent above last year and $3.4 million below the general revenue forecast.