Tax Officials Use Sleight-of-Hand to Help Balance State Budgets

Tax Officials Use Sleight-of-Hand to Help Balance State Budgets
November 1, 2003



In an effort to avoid cutting programs and raising taxes, officials in a handful of cash-strapped states used bureaucratic sleight-of-hand to shift revenue into fiscal year 2004 by moving forward the date on which tax payments are due.

Called a “revenue acceleration,” this controversial accounting technique was employed by six states--Georgia, Illinois, Kansas, Maryland, Minnesota, and Oklahoma--to the tune of more than $300 million this year, according to the National Conference of State Legislatures (NCSL).

Although not large in the context of total state budget deficits--which were estimated at more than $70 billion in fiscal year 2004--this dollar amount can make the difference between a balanced budget and one that requires new taxes or program cuts, budget officials said.

“We get a one-time shot of $180 million and that allows us to get through this budget year without deeper cuts than what already have to be done and without increasing taxes,” said Kansas budget director Duane Goossen.

Kansas nets its one-time shot by moving property tax payments from July 2004 to June 2004, the last month in fiscal year 2004. Because these tax payments are usually made twice a year--once in July and once in January--the move will enable Kansas to receive three property tax payments this fiscal year, with the payments coming in July 2003 and January and June 2004. The state made the change permanent.

“The state has used just about every tool in the budget tool box--we cut budgets, we raised taxes a year ago, we used balances and now, this year, we’re also using one of these accelerators. It’s one piece of a much larger solution,” Goossen said.

Minnesota has been collecting sales taxes at an accelerated clip for more than a decade, despite repeated attempts to return to a more normal schedule. This year, the state increased the rate of collection to raise more money in fiscal year 2004 than the state would have received under the already-accelerated schedule.

“The sales tax that businesses would normally pay in July they pay in June. We’re going to force ourselves to undo this someday, because we know it’s not a good fiscal management deal. It’s something that allows the state to live beyond its means and not face tougher choices,” said Minnesota budget director Peggy Ingison.

Duane Benson, executive director of the Coalition of Minnesota Businesses, said his organization has long opposed the accelerated sales tax and will fight for its removal in the future.

“It’s been a cycle in Minnesota, where when the revenues get tight they tend to want to collect revenue in advance, to accelerate it. We’ve always felt that that’s bad accounting. It’s another one of those gimmicks that prolongs the obvious problem,” Benson said.

He added that this creates administrative headaches for the state’s businesses.

“It’s not only bad policy. It’s kind of a nightmare for the people that have to do it. Businesses have to estimate the revenues and collect before the money is in hand,” Benson said.

Until this year, Minnesota businesses had been required to pay 75 percent of their June sales tax in the month of June and 25 percent in July. In most states, businesses do not have to pay sales taxes at all until the month after they are collected. To garner additional revenue in fiscal year 2004, Minnesota lawmakers raised this year’s June rate to 85 percent.

“Businesses are required to pay us ahead of the time that they actually collect the tax. We’re taking money from them that they haven’t yet collected on our behalf,” Ingison said.

Through this action, Minnesota gained an additional $20.6 million in fiscal year 2004. It made another $17.1 million by doing the same with cigarette, tobacco, and alcohol taxes. A change to the state’s property tax collection garnered an additional $14.7 million in this year.

Georgia lawmakers raised an additional $130 million this year by shortening the period during which employers must pay the taxes they withhold from employee paychecks.

“From time to time it has come up as something in a policy bank that could be done if the state were under fiscal stress. So we tapped the policy bank, I guess you could say,” said Henry Thomassen, economic advisor to Gov. Sonny Perdue (R).

Thomassen said the move to a shorter period brings the state in line with federal regulations. He said the longer period had been allowed as a boon to Georgia businesses.

“By being able to hold money for longer periods, corporations had the opportunity to pay their bills earlier or collect interest on the money they owed to the state,” Thomassen said.

Despite the fact that the shorter period could disrupt Georgia businesses, Thomassen said there was little opposition to the change.

“There seemed to be very little sentiment against the shift. Whether that sentiment will show up after the provision has been in effect for a while, I don’t know. The political noise sometimes develops one or two years after a change, as businesses come to recognize what has happened,” he said.

Other states accelerating revenue collections include: Illinois, which raised $50 million this year by accelerating tobacco tax collections; Maryland, which garnered $6.5 million by requiring more frequent payroll tax payments; and Oklahoma, which added $14.7 million by accelerating sales tax collections, according to NCSL.


Jason White is a staff writer for Stateline.org. His email address is jwhite@stateline.org.