Arkansas Budget Surplus: Reserve Funds, Tax Cuts, and Prisons

The Arkansas budget surplus has landed in the black every year since fiscal year 2022, but the size of that cushion is falling fast. The state closed FY 2024 with a $698.4 million surplus, FY 2025 with $367.9 million, and forecasters expect roughly $334.4 million for FY 2026. That is a long way down from the $1.628 billion record set in FY 2022. Lawmakers have steered the money into reserve accounts and one-time appropriations, chiefly income tax cuts and prison construction.

Surplus by Fiscal Year

Arkansas’s fiscal year runs July 1 through June 30, and the surplus is tallied at the close of each cycle. The five-year picture:

The FY 2026 forecast pegs net available revenue at roughly $6.83 billion, with about $6.49 billion allocated through the state spending plan.3Arkansas Department of Finance and Administration. Official General Revenue Forecast FY 2026-2027

What Counts as a Surplus in Arkansas

The number only makes sense against the state’s spending plan. Under the Revenue Stabilization Act (Arkansas Code Title 19, Chapter 5), the legislature sorts general revenue spending into priority tiers. Category A gets funded first. Category B gets funded next. Anything collected beyond what is needed to fully fund every category is classified as surplus general revenue.

For FY 2024, net available general revenues came in at $6.90 billion. That fully funded Categories A and B and left $698.4 million on top.1Arkansas Department of Finance and Administration. General Revenue Report for June FY 2024 Because lower tiers absorb any shortfall before higher tiers do, the general revenue budget essentially cannot run a deficit. A “surplus,” then, is not just leftover cash; it is revenue that came in past every commitment the state made for that year.

Why the Surplus Keeps Shrinking

Four rounds of income tax cuts enacted between 2022 and 2024 have deliberately pulled revenue out of the pipeline. The most recent round dropped the top individual income tax rate from 4.4 percent to 3.9 percent and the top corporate rate from 4.8 percent to 4.3 percent.4Arkansas Department of Finance and Administration. Income Tax Withholding Tables Adjusted Due to Most Recent Tax Cut Those rates remain in effect for 2025. The top individual rate of 3.9 percent applies to income above $25,700 for filers earning $92,300 or less, and to all income above $4,600 for higher earners.5Arkansas Economic Development Commission. Personal Income Tax Rates in Arkansas The corporate rate of 4.3 percent applies to taxable income above $11,000.6Arkansas Economic Development Commission. Corporate Income Tax Rates in Arkansas

Rate cuts are permanent; the surpluses that paid for them are not. Each round lowered the state’s revenue baseline going forward while spending obligations kept rising with inflation and program growth. That is the mechanical reason the surplus has fallen from $1.6 billion to a projected $334 million in four years.

The 2022 and 2023 windfalls also had a one-time flavor. They were fueled by unusually strong post-pandemic wage growth and consumer spending, running well ahead of the conservative revenue projections the state uses by design. When the economy outperformed those projections, the gap between the budget and actual collections was enormous. As growth has normalized and the tax cuts have taken hold, the gap has closed.

Where the Surplus Money Goes

Once a surplus is confirmed at year end, the funds move in two directions: into reserve accounts and into one-time legislative appropriations.

The Catastrophic Reserve Fund

The Catastrophic Reserve Fund is Arkansas’s rainy day cushion for revenue shortfalls. If the state’s chief fiscal officer determines that projected gross general revenue will grow less than three percent year over year because of changing economic conditions, the officer can authorize transfers out of the fund to keep operations running.7Justia Law. Arkansas Code 19-6-486 – Catastrophic Reserve Fund As of early 2025, the fund held roughly $1.9 billion. There is no fixed statutory percentage for contributions; the fund receives whatever the General Assembly directs into it.

The Restricted Reserve Fund

The Restricted Reserve Fund is more flexible. Money in it can be released to general revenue operating accounts, to the Department of Transportation for state highway matching funds, to the Development and Enhancement Fund, or to other purposes the legislature authorizes. Releasing funds requires approval from three-fifths of the Legislative Council quorum, or from the Joint Budget Committee when the legislature is in session.8Justia Law. Arkansas Code 19-5-1263 – Restricted Reserve Fund

After the $1.16 billion FY 2023 surplus, the legislature also created a new reserve account for approximately $710 million that had gone unallocated, framed as a buffer against downturns and unforeseen costs.

Tax Cuts

The four rounds of income tax reductions since 2022 were made possible by the run of large surpluses. Because rate cuts reduce future revenue permanently, state officials have emphasized that the one-time surplus dollars were not being used to finance the ongoing cost of those cuts; the surpluses provided the political room to enact them.

Prison Construction

Corrections has been the other major destination. The legislature set aside $75 million in 2022 and $330 million in 2023 for prison expansion, then advanced a $750 million appropriation in 2025 for a new 3,000-bed prison in western Arkansas. Capital projects like these are one-time expenditures, which is why surplus dollars fit them. The scale is worth noting: that single prison appropriation exceeds the entire projected FY 2026 surplus.

What This Means for FY 2026 and Beyond

The state will still generate a surplus in FY 2026 on current projections, but a $334 million cushion leaves far less room for new initiatives than the billion-dollar surpluses of 2022 and 2023.3Arkansas Department of Finance and Administration. Official General Revenue Forecast FY 2026-2027 The Catastrophic Reserve Fund’s roughly $1.9 billion balance is a real safety net if revenue drops sharply, but it exists for emergencies rather than ongoing operations. The open question for lawmakers is whether revenue growth at the lower tax rates can sustain both the spending plan and continued surpluses, or whether the era of large annual windfalls has run its course.