SIOUX FALLS, S.D. (KELO) — As the COVID-19 pandemic spreads through South Dakota so does its potential negative economic impact on city and state budgets.
“We anticipate that COVID-19 will have an impact on sales tax and other revenues,” said Mark Quasney, the state economist for the South Dakota Bureau of Finance and Management.
Gov. Kristi Noem has already said in at least one news conference that in June, the Legislature would address sales and use tax revenue losses.
The city of Sioux Falls’ general fund budget and the state’s general fund budget are heavily dependent on sales and use tax revenue.
A large part of the city’s general fund revenue, or $68 million comes from sales and use tax, and another $68 million comes from property taxes, city finance director Shawn Pritchett said.
The second-penny sales tax in Sioux Falls funds the majority of the city’s capital improvement projects.
The third-penny sales tax, or entertainment tax, is what helps maintain the Washington Pavilion, Sanford PREMIER Center and similar entertainment venues in the city.
“The sales and use tax is the single largest revenue source for the state’s general fund and accounts for approximately 63% of ongoing general fund revenue,” said the state’s governor’s summary of the fiscal year 2021 budget.
Sioux Falls provides about one-third of the state’s overall sales and use tax revenue, Pritchett said.
City and state officials expect sales and use tax to decline because of physical social distancing and limits on customer counts in restaurants and bars, a loss of retail sales as some stores have closed or changed hours and spending habits change.
For fiscal year 2021, 63% of South Dakota’s general fund budget is slated to come from sales and use tax revenue. The total estimated amount is $1,086,856,416, according to the South Dakota Bureau of Finance and Management’s February 2020 revenue forecast presented to the Joint Appropriations Committee.
The state already revised the fiscal year 2020 after revenue forecasts showed sales and use tax revenue was about $3.9 million lower than the forecast during the legislative session. Revenue from insurance company tax and contractor’s excise tax was also down for a total, with sales and use tax, of $5.9 million.
The revised estimated amount for fiscal year 2020 is $1,069,959,268.
How much that city and state sales tax and use tax revenue could decline is uncertain.
“We won’t know for several months,” said Pritchett.
Monthly sales and use revenue figures reported each month are usually for the prior month. The March report included figures from February. “Year to date we were up 7% through March,” Pritchett said.
Now, city officials are working on modelings to “make some educated estimates” on the impact of COVID-19, Pritchett said.
Models will include information about the duration of the pandemic’s spread, the peak of COVID-19 and other factors, Pritchett said.
“…how do we absorb it if it’s this, how do we react of the impact is higher…” Pritchett said of scenarios in the model.
The state also uses modeling to forecast revenue.
“BFM uses an econometric model to model the national and state economies,” Quasney said in an email response to KELOLAND News. “That model is then used to forecast some categories of revenue, including sales tax. We work with IHS Markit, a prominent economic forecasting service, and the Governor’s Council of Economic Advisors to help inform our model and estimates. “
While there is potential bad news about COVID-19’s potential impact on sales and use tax, there is good news.
“Our general operations fund has a sizeable reserve, so we have the ability to adapt more easily” Pritchett said. The fund is about $55.7 million or 32.4% of the city’s annual operating fund, he said.
A reserve fund can help the city absorb some loss of sales and use tax revenue but the city can’t deplete that entire reserve because the reserve may also be needed in the future beyond 2020 and fiscal year 2021, Pritchett said.
It’s the city’s policy to have a minimum of 25% of the annual general fund in reserve, Pritchett said.
This past year the city also set aside $1.7 million in reserve in the capital improvement fund, Pritchett said. It’s unusual for cities to have a reserve in the capital improvement fund, he said. The total reserve there is $2.4 million.
The fiscal year starts on July 1. The summary of the governor’s fiscal year 2021 budget said historically about 61.33% of the total revenue collected from sales and use tax is received during the first seven months of the fiscal years.
If the COVID-19 pandemic is waning by July and August it’s conceivable that sales and use tax revenue could start bouncing back from the expected downfall in March, April, May and other subsequent months.
The state has returned from a one-year year downturn before.
The state’s sales and use tax revenue did not increase in fiscal year 2010 from FY2009. FY2010’s revenue was a 1.9% decrease because of the recession, the governor’s FY 2021 budget summary said.
But, sales and use revenue did increase in fiscal year 2011 by 8.9%.
While the state has had steady increases in sales and use tax revenue since 2011, some of the growth can be attributed to increasing the tax percentage from 4 % to 4.5% in 2017.
The increase for FY 2017 helped to offset what would have been negative sales and use tax revenue growth, according to the governor’s FY2021 budget summary.