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Daily Tax Report: State

Extended Tax Deadlines Make Balancing State Budgets Tricky

April 1, 2020, 8:45 AM

Pushing the tax payment deadline back to July 15 means states won’t get revenue they were counting on in the current fiscal year which, for most, ends June 30.

The financial squeeze is especially tight because nearly every state has a balanced budget requirement, and only 11 states are permitted to carry over a deficit into the next fiscal year. That leaves state lawmakers and economic officials forced to tap into rainy day funds and creatively patch together spending plans in economies already devastated by fallout from the coronavirus pandemic.

“It’s going to be tricky,” said Colorado state Rep. Kim Ransom (R), a member of the General Assembly’s Joint Budget Committee, which prepares budget recommendations for the full assembly to consider.

The National Conference of State Legislatures reports that, as of Tuesday, 17 states had enacted budget legislation in response to the outbreak. Several have passed bills either appropriating additional funding for coronavirus-related responses, or authorized transfers from their rainy-day funds.

“The problem is that a certain amount of FY 19-20 dollars are not going to come in until the new fiscal year,” Elizabeth McNichol, senior fellow at the Center on Budget and Policy Priorities, said in a phone interview.

States will resort to using funds for other purposes to address what will clearly be acute budget problems at the end of the current fiscal year, she said.

“And some small businesses are going to go bankrupt” in the 90-day-window between the old filing deadline and the new one, she said. “So it’s not just a question of moving the money around, it’s whether the money is going to be there to move around.”

Standing By As Revenue Drops

At the moment, lawmakers in many states aren’t even able to hold meetings, given concerns about the spread of Covid-19. Once legislatures return, they’ll be rushed to put together new or amended budgets in light of the billions in aggregate tax revenue that will be coming in late, if at all.

Lawmakers are forced to stand by and watch as revenue plummets. Colorado state Sen. Rachel Zenzinger (D), also a member of the Joint Budget Committee, noted that state economists released a quarterly forecast March 16—three days after the legislature adjourned—already showing a $750 million drop in expected tax revenues in FY 20-21 as a result of the pandemic’s effects.

“In a week’s time that has jumped to $1.4 billion,” she said. “It’s been challenging. We had the budget about 98% done before the virus hit, so we’re going to have to more or less scrap many of the decisions we already made and start over.”

Lawmakers said they’ll be banking on the federal government for help with their cash flow woes. The coronavirus stimulus measure (Public Law 116-136), signed by President Donald Trump March 27, includes $150 billion in aid for state and local governments. The money is tagged to help states meet expenses associated with the public health emergency, but also to offset steep revenue declines.

Except for Vermont, all 50 states plus the District of Columbia have balanced budget amendments or statutory requirements of one kind or another. If revenue comes up short near the end of the fiscal year, states might run afoul of the prohibition on carrying over a deficit.

Many states are able to use modified accrual accounting, which permits them to recognize revenue when it becomes available, said Dan White, director of government consulting and fiscal policy research at Moody’s Analytics. That means money that comes in in July can be “accrued back” to the prior fiscal year, although that won’t help with the looming FY 19-20 cash flow needs, he said.

Do We Have the Cash?

States often carry very low cash balances in March and April in anticipation of getting income tax revenue, he said. But this year, as recessionary pressures mount, they might not see the eventual cash flow. States will have to ask themselves, “Do we have the cash without having to do short-term financing?” White said.

Mississippi moved its tax payment deadline back only a month, to May 15, to meet its statutory requirement to have a balanced budget by June 30, the end of its fiscal year, according to a March 26 taxpayer advisory.

“We cannot move this deadline out past the fiscal year end without express direction from the legislature and the governor because this will create a $500,000,000 deficit for the current fiscal year,” said the statement from the Mississippi Department of Revenue.

To address the need for cash, states will have to employ a number of tools, Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, said in a phone interview. They’ll rely on the federal relief money, but also dip into rainy-day funds and consider issuing revenue anticipation notes with the expectation the taxes will eventually show up.

One additional way the federal government could bring relief to the states is to boost the amount of matching funds it provides to cover expenses for Medicaid and the Children’s Health Insurance program, said Kate Watkins, chief economist for the Colorado Legislative Council.

At the moment states don’t have estimates for the eventual revenue hit of the virus, and they worry about the risks associated with having to wait three months longer for income tax payments. “The magnitude of all this is hard to gauge at this point,” Sigritz said. “The shift in revenues is just another curveball they’ll have to deal with.”

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

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