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<i>The Week in Public Finance</i>: State Revenues Stabilizing, Pension Liabilities Climbing and Lost Sales Tax Revenues

A roundup of money (and other) news governments can use.

Connecticut was one of the last states to finalize a budget this year. Gov. Dannel Malloy signed it in November.
(TNS/Harry E. Walker)

Fewer States Reporting Revenue Declines

It’s all about perspective. A new analysis from the Rockefeller Institute of Government finds that 11 states saw revenue declines during the last three months of fiscal 2017. That sounds bad until one remembers that a full 19 states were in the same predicament a year ago.

The report’s author, Lucy Dadayan, found that the losses were more concentrated in Eastern states and were primarily due to lower income tax revenues.

The analysis also gives a preliminary picture of how fiscal 2017 compares with 2016. Dadayan estimates that 10 states -- Connecticut, Illinois, Mississippi, New Hampshire, New Mexico, New York, North Dakota, Oklahoma, Rhode Island and Wyoming -- collected less in tax revenue in 2017 than they did the year before.

The Takeaway: The numbers confirm earlier reports that income tax revenue was anemic in 2017. But there’s reason for states to have hope for the current fiscal year. The report notes that preliminary data for the first three months of fiscal 2018, which began in July in most places, indicate much stronger growth. On the whole, personal income tax revenue grew by 4.7 percent and sales taxes increased by 2.7 percent, compared with the first three months of fiscal 2017.

Only Alaska, Connecticut, Maryland and Wisconsin reported a decline in total tax collections for that three-month period.


Weighed Down by Pensions

Pension debt continues to weigh down state and local government balance sheets.

Among states, Fitch Ratings reports that the median long-term liability burden ticked up slightly over the past year. Of course, there is considerable variation between states. Illinois has the highest liability burden, equal to 28.5 percent of its total taxpayer income. Alaska, Connecticut, Kentucky and New Jersey have pension liability burdens higher than 15 percent of personal income -- far higher than the median 3.1 percent. Meanwhile, Nebraska has the lowest burden at 1.4 percent of personal income. 

The story is much the same for local governments. Moody’s Investors Service reports for the largest 50 local governments, the pension burdens amount to more than double debt and unfunded retiree health-care liabilities combined. For those governments, total unfunded pension liabilities reached $456 billion last year, up from $390 billion the prior year. Chicago, Dallas and Houston, which combine for about $60 billion in unfunded liabilities, shoulder the biggest burdens.

The Takeaway: When considering how credit ratings agencies score pension liabilities, it’s important to remember they typically use their own math. Both Moody’s and Fitch assume lower investment returns over time because they believe this is more realistic than what most plans assume. The end result is that agencies take plans’ reported liabilities and then adjust them. While Moody’s has done this for some time, this year marks the first time Fitch has released its annual pension report using more conservative figures.

Pension plans don’t much like these conservative figures because it makes their fiscal health look worse. Still, a fair number of them have stepped down their return assumptions in recent years, an acknowledgement that the higher targets of the past decades are unlikely to materialize in the future. But their average annual investment return assumption is still north of 7 percent -- more than a percentage point higher than what Moody’s and Fitch believe is realistic.


How Much Sales Tax Revenue Is Really Lost Online?

A new Government Accountability Office (GAO) report lowers a figure commonly used by state and local governments when talking about lost online sales tax revenues.

The report looked at online transactions in the 45 states and the District of Columbia which levy a sales taxes. States can’t collect the tax on businesses that don’t have a physical presence there. This has resulted in many goods being sold tax-free online. The National Conference of Legislatures pegs the lost revenue figure at around $23 billion annually.

But the GAO says it’s likely much lower. It estimates that state and local lost revenues is somewhere between $8.4 billion and $13.5 billion annually.

The Takeaway: The discrepancy is likely because there have been increasing cases where state and local governments are collecting a tax from a remote seller. Notably, Amazon, the largest internet retailer, now has deals in roughly 39 states to remit a sales tax for purchases made through the site.

The GAO estimates that state and local governments can currently require remote sellers to collect about 75 to 80 percent of the taxes that would be owed if all remote sellers were required to collect a sales tax. Nevertheless, governments are still collectively losing out on billions each year.

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Liz Farmer is a former GOVERNING fiscal policy writer.
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