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Interest on unprecedented amounts of federal cash keeps state budget afloat

Over the last 12 months, the state collected $7.7 billion in revenue, about $18.4 million or 0.24% more than was collected the previous fiscal year.

If not for collecting $68.7 million or 84.4% more in interest earnings than the previous fiscal year, the state would have been in the rare situation of collecting less revenue than the previous year for only the sixth time since 1970.

Interest earnings were buoyed by high interest rates and unprecedented surplus state cash on hand. The state has accumulated large surpluses in part because of billions in federal dollars that poured into the state in response to the COVID-19 pandemic.

The latest revenue report, for the fiscal year that ended June 30, was released recently by the staff of the Legislative Budget Committee. The latest revenue report and upcoming monthly reports will be watched closely as some legislative leaders are again advocating for major tax cuts that could impact future state collections and the revenue available to fund services such as health care, education and road and bridge work. House Speaker Jason White has formed a task force to study possible tax cuts and Gov. Tate Reeves continues to advocate for the elimination of the income tax that accounts for about 30% of state revenue.

In the first two years after the pandemic, the state — fueled in part from federal money and inflation resulting in higher sales tax returns — collected unprecedent revenue. But in the past two years, especially the just completed fiscal year, revenue collections have slowed dramatically.

Still, because of conservative revenue estimates adopted by legislative leaders and because of conservative budgeting – leaving state needs unmet according to some – the slowing revenue estimates have not forced cuts to be made to budgets approved by the Legislature.

The revenue collections for the past fiscal year were $181.7 million or 2.41% above the official estimate. The Legislature sets budgets based on this estimate.

And it is also important to note that the revenue above the estimate would have been much less if not for the aforementioned interest on earnings, which came in $120 million or 400% above the estimate.

The amount collected above the official estimate — $181.7 million — will go into surplus that can be appropriated by the 2025 Legislature. In recent years as state revenue collections have grown by unprecedented amounts, the surplus funds have primarily been used for projects, such as to build or renovate governmental buildings and on public transportation and infrastructure.

According to the recently released report, sales tax, the 7% tax on most retail items, grew $81.8 million or 3% year over year while the use tax (the sales tax on internet sales and other out-of-state purchases) increased $18.9 million or 4.9%.

On the other hand, there was a big dip in personal income tax collections, $141.8 million or 5.9%. Income tax collections were expected to decrease because a $525-million cut in the income tax is being phased in. But the sales tax has not grown at the rate many income tax proponents predicted it would to offset the cut in the persona’ income tax.

The corporate income tax also decreased year over year — $69.5 million or 6.7%.

One of the bright spots in revenue collections continues to be the premium tax levied on most insurance policies. It grew 16.8% or $61.3 million.

The casino tax was down $7 million or 4.3%. The tax on medical marijuana was down $461,400 or 5.8%.

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