The frontier has nearly been conquered

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But a remnant of the past still lingers

Former President Harry S Truman was fond of saying “the buck stops here.” He even had a sign on his desk in the Oval Office with those words inscribed on it.

The term derives from the frontier days when a knife with a buckhorn handle was used to indicate whose turn it was to deal in a poker game. When a player didn’t want to deal, they would pass the “buck” to the next player. The saying has become synonymous with taking responsibility and not passing off tough decisions and their corresponding consequences to the next generation, something our political leaders often fail to do.

Passing the buck on state budgets

State budgets are one of the areas where the buck is most often passed. Legislatures across the country, in good times and bad, seem to barely string together budgets year in and year out that continually pass off tough decisions to their successors. Whether hoping an unexpected windfall will rescue future legislators from difficult choices or merely shirking of responsibility are to blame, most states have placed themselves in precarious financial situations. Now with the fallout of COVID-19 bringing significant unexpected revenue shortfalls, states teetering on the brink of solvency are being confronted with harsh truths from which legislators won’t be able to wriggle free and pass the buck once again.

According to the National Association of State Budget Officers, the average governor’s budget was based on 3.4% general fund revenue growth in 2021. Prior to COVID-19 this wasn’t altogether unrealistic as the economy was experiencing all-time highs in job growth and gross domestic product with record low unemployment.

However, average general fund spending was on track to grow 5.8%, preceded by two years of general fund spending growth above 5%. In other words, states have been raking in more money than projected in the past few years, but they have been spending it as quickly as they get it. To be fair, some states have increased their rainy-day funds to all-time highs because of record revenue, however, the spending never decreased.

Effect of COVID-19 on state budgets

COVID-19 is taking its toll on state budgets in a unique way. Most states are dependent on a mix of property, income and sales taxes to fund their financial obligations with 75% of general fund revenue on average coming from the latter two. The governors’ budgets mentioned earlier are typically proposed in December or January prior to a legislative session so none of them anticipated COVID-19 and its fallout.

With unemployment rocketing to nearly 15% in April and stay-at-home orders in effect, gross domestic product had its worst quarter since World War II. Tourism, retail and restaurants are all struggling to stay in business as the wheels of commerce are still slowly turning. The corresponding effect on state budgets has been similarly bleak.

Revenue from state income and sales tax has significantly decreased. Several states are now revising revenue projections downward by more than 20%, with the majority of states projecting decreases of 10% or more. That is leaving many states with multibillion-dollar budget deficits that far surpass what was seen during the Great Recession.

At the same time, expenditures for Medicaid and state-funded health care is expected to greatly increase in response to the pandemic.

COVID-19 Revised State Revenue Declines 
Percent of Pre-COVID Projections Fiscal Year in WEDA-served States

State

FY 2020

FY 2021

Source

Alaska

11%

15%

Legislative Finance Division

Idaho

Info NA

Info NA

Division of Financial Management

Kansas

11%

6%

Office of Consensus Revenue Estimates

Missouri

Info NA

Info NA

Office of Administration

New Mexico

5-6%

22-30%

Consensus Revenue Estimating Group

Oklahoma

7%

16%

Board of Equalization

Oregon

Info NA

11%

Office of Economic Analyses

Texas

9.3%

10%

Comptroller of Public Accounts

Washington

15%

Info NA

Economic and Revenue Forecast Council

Editor’s note: This chart provides details on revised state revenue declines as a result of the coronavirus pandemic. Some states, such as Oregon and Texas, operate using biennium budgeting, while others have enacted budgets but may not fully know what revenue shortfalls may occur in dealing with COVID-19. This information was provided by the National Conference of State Legislatures.

The NCSL also keeps track of cuts made to state budgets. State revenue collections across the country plummeted as commerce slowed down to curb the spread of COVID-19. As a result, states face major budget shortfalls. To illustrate the implications of these budget gaps, the NCSL created a database detailing state budget-cutting and revenue-increasing measures. The database brings up-to-date, real-time information in the 50 states and the District of Columbia. For details, visit, see www.ncsl.org.

Compounding the problem was the decision by the vast majority of states to move the tax deadline to July 15 to be consistent with the changed federal deadline. Because of the change, many states remained uncertain about tax revenue heading into special budget sessions to make revisions. By late June of this year, nearly half the states had not enacted a 2021 budget because of the uncertainty in revenue forecasts.

The Fate of Farm Equipment Sales Tax Exemptions

Heading into next year there is no doubt that legislators will have to make funding choices based on scarce resources. The challenge will be daunting and many states are clearing the way by already stating that 2021 legislative sessions will be entirely focused on the budget while other policy considerations will be tabled. That is good news for dealers when it comes to other issues we have been battling, such as Right to Repair, although it creates a different set of challenges for which we must be prepared.

As legislators weigh cutting state employees or reducing Medicaid expenditures, they will also be looking at ways to increase revenue to avoid those options as much as possible. One area the states are already looking to for raising revenue is sales tax exemptions in place for a range of industries, which includes the equipment industry. States like Texas have already undergone an exhaustive examination of all sales tax exemptions in preparation for the 2021 legislative session. The State of Idaho’s Office of Performance Evaluations is currently undertaking analyses of all state sales tax exemptions, including those for farm equipment.

The danger lies in the amount of money generated by sales tax exemptions for farm equipment. In 2018, the Kansas legislature attempted to eliminate the farm equipment sales tax exemption to fill a budget shortfall during otherwise normal conditions. Oklahoma had similar proposals that same year. Both states depend on agriculture as their number one industry and neither is known for being hostile to the ag sector.  

In these extraordinary circumstances, it is easily foreseeable that the Kansas and Oklahoma legislatures and others would return to the same source for filling much larger deficits.

Preparing for the Worst

The rationale against eliminating sales tax exemptions for farm equipment remains strong. The additional tax burden would be placed on farmers and ranchers who are already being hit hard by the pandemic after years of sagging commodity prices and decreased net farm income. One of the only bright spots during this pandemic is the availability of relatively cheap, good food. We don’t want to add price pressure to the grocery store on top of all the other challenges we face by placing more burden on producers, which would jeopardize the abundance we now have.

With the election just around the corner, WEDA will be watching closely what happens with an eye toward 2021 legislative sessions. We are already working closely with state chambers of commerce and their tax policy committees to ensure that dealers are not singled out for unfavorable tax treatment, and WEDA is working with producer and commodity organizations toward the same end to make sure legislators don’t use a remnant of the frontier and pass the buck to our industry.


Article Written By Eric Wareham

ERIC WAREHAM is the vice president of government affairs for the Western Equipment Dealers Association. He is a graduate of the Willamette University College of Law and Augusta State University. Eric may be reached by writing to ewareham@westerneda.com.

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