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After July, economic downturn could impact state budget Monday, Feb 4, 2008 By Jason Wiest Arkansas News Bureau LITTLE ROCK - Despite passage of the largest tax cuts in Arkansas history last year, a conservative fiscal budget should provide a hedge for state tax coffers against a national economic downturn, at least through June, the state's chief fiscal officer says. "I think we're in pretty good shape this year to have the budget just about fully funded," said Richard Weiss, director of the state Department of Finance and Administration. Weiss and his staff knew a weakening of the economy was coming long before the Legislature and Gov. Mike Beebe enacted more than $300 million in tax cuts over two years that took affect in July, when the state had a $919 million surplus. What no one knew was when, and how hard, it would hit. An estimate on the damage came this week in a preliminary report from the U.S. Department of Commerce. In the last three months of 2007, the U.S. gross domestic product - the market value of the goods and services produced by the nation - grew at a sluggish annual rate of 0.6 percent, according to the report. Private economists had forecasted growth of 1.2 percent. In all of 2007, the nation's GDP grew at 2.2 percent, the slowest pace in five years. Weiss says he isn't ready to call the downturn a recession yet, but Kathy Deck, director of the University of Arkansas Center Business and Economic Research, did not hesitate. "To the average person, that feels like a recession," which is technically defined as two consecutive quarters of negative growth, she said. If the revised numbers from last quarter show negative growth, and if the expectation of negative growth in the first quarter of 2008 comes to fruition, her assessment, and those of most economists, will be by the book. Whatever it's called, Arkansas has seen ill effects across economic categories. In December, the state's unemployment rate rose to 5.9 percent, the highest since November 2003. State sales tax collections, an indicator of consumer spending, have fallen in five of the past six months in year-over-year comparisons. The monthly declines, the largest being 5.2 percent in August, can be partly explained by the $121 million cut in the sales tax on groceries, however. Home sales have slowed dramatically in Arkansas, although values have been rising slightly. In a state that is usually insulated from national economic trends, the Northwest Arkansas housing market has taken the worst beating. Benton County hit a record with 299 foreclosures in December, the highest since RealtyTrac has reported the data and well above the 85 reported in December 2006. Washington County reported 113 foreclosures, nearly three times more than in December 2006. With the national credit and housing markets in even worse shape than Arkansas', the only question now is how much worse the economic situation will become. It's impossible to tell, but the federal government is taking steps to lessen the blow. Congress is working on an economic stimulus package that would include tax rebates to promote consumer spending, which accounts for between 70 percent and 80 percent of U.S. economic activity, Deck said. Also, the Federal Reserve cut interest rates for the fifth time since September last week, reducing it another half a percent to 3 percent. "If the results of that are that businesses don't contract anymore and in fact expand, then we could have a shallow recession and move on pretty much unscathed," Weiss said. Deck said if everything goes well, the economy could pull out of this tough period by the end of the year. And if governmental action does not work? "I've got some concerns just depending on how things start happening this spring," Weiss said. "If the recession is prolonged and it gets deeper than people think, that's clearly going to have an affect on us." Even a shallow recession will mean some pain for the state budget, Deck said. But the deeper the recession, the deeper the burn, she said. "Certainly if the downturn is prolonged or severe, then the state will suffer and will have to ... either raise taxes to get more revenues or cut the spending that was planned," she said. It would not be the first time state programs got cut in the wake of a recession that was preceded by tax cuts. The state cut taxes by a total of $162 million in 1997 and 1999. The largest cut came in 1997 with a $95 million income tax reduction. Other cuts affected capital gains, corporate dividends and the sales tax on used vehicles, manufactured homes and timber equipment. Also, $25 million in homestead property tax refunds were made in 1999. The national economy then slipped into recession after a number of Internet companies, whose stock prices rose rapidly behind speculation, went belly up. In the wake of the bubble-busting of the dot-com boom, Arkansas was forced to cut its $3.4 billion budget for fiscal year 2002 three times. By the end of the year, $209 million had been slashed from the state budget, forcing many state agencies to cut programs and staffing. Another $67 million was cut from the budget in the next fiscal year. "I hope it's not that bad," said Weiss, who has headed the state's fiscal office off and on since 1994. "That 2001-2002 recession really hit all of the states harder than anything that I've been associated with." |
