State government economist answers questions about South Dakota budget’s COVID-19 situation

Capitol News Bureau
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PIERRE, S.D. (KELO) — Mark Quasney was named state government’s economist last year. He answered questions Tuesday night about how South Dakota’s economy is faring during the COVID-19 situation and the accompanying slowdown in revenue for state government. Governor Kristi Noem posted the latest report Monday. KELOLAND Capitol Bureau reporter Bob Mercer asked the questions of Quasney.

State collections of sale and use taxes decreased slightly in April for March sales, after subtraction of state collection expenses. Among larger-population counties, there were decreased taxable sales year to year for Beadle, Brookings, Codington, Davison, Lake, Lawrence, Minnehaha and Pennington; and increased taxable sales in Brown, Clay, Hughes, Lincoln, Meade and Yankton. Are there signals that collections can be expected to deteriorate in May collections for April sales?

Quasney: There is indication that April sales will be more impacted than March. Prior to the onset of the pandemic sales and use tax collections were posting strong growth. This growth likely continued until at least the middle of March and likely through three weeks. A document outlining the actions taken by the state and the 10 biggest cities and the dates those actions were taken can be found on the BFM website at: https://bfm.sd.gov/dashboards/COVID_19_Action_Dates.pdf

In addition, there are indications that stockpiling of certain goods, such as groceries, helped to offset the losses seen in other areas. While we anticipate that those types of transactions will have remained elevated, they will be less so as individuals consume stockpiles purchased in the previous month. At the same time, we expect losses for hotels, restaurants and certain retailers to be greater as they experienced a full month of restricted activity.

Are video lottery establishments reopening? Based on recent weeks, is net machine income rebounding? Is there any forecast when NMI will return to previously projected amounts?

Quasney: Yes, as local governments are modifying their ordinances, South Dakota Lottery has been re-enabling video lottery terminals.  As the ordinances have been modified and video lottery terminals re-enabled, there has been an increase in net machine income.  It is too early to tell when net machine income will return to previously projected amounts, as consumers and players have adjusted their habits. Further information can be found here: https://bfm.sd.gov/dashboards/EconomicMetrics20200505.pdf

Contractor excise tax collections were above the Legislature’s revised estimate. Is this a product of weather, or numbers of construction projects, or project size, or some combination?

Quasney: The factors you mention are all significant factors in CET revenues and are contributing to the growth we are seeing in this category. Historically, CET has had a lagged response to economic shocks. This is due to the planning and preparation timelines involved with construction projects.

Regarding the category of licenses, taxes and fees, there was a substantial shortfall. Was this normal? The BFM note for this category says the decline results largely from securities fees not being transferred and the amount is expected to correct for the next month. I’m not clear how to interpret that.

Quasney: Securities fees are collected by the Department of Labor and Regulation and transferred to the general fund on a quarterly per SDCL 4-4-4.4. Typically, the general fund receives a transfer in April. This transfer will occur in the first week of May and balance out at that point. This is not lost revenue, just a slight delay in when it came into the general fund.

On bank-franchise tax, when can state government expect the current shortfall to be recovered?

Quasney: The IRS provided the extension until July 15th. We anticipate that bank franchise tax revenues will continue to flow in from now until that date.

Regarding tourism tax, I wasn’t able to locate the year-to-year comparison report. What is the forecast there for the tourism season ahead?

Quasney: We expect that tourism activity will continue to be impacted for the near future. We are monitoring the situation and tourism sentiment. Further information on that can be found online at: https://sdvisit.com/covid-19/covid-19-research-weekly-updates.

How much is in state government’s reserves? Is there an expectation that reserves will have to be tapped for the current fiscal year?

Quasney: The state’s reserves are comprised of two funds, the General Revenue Replacement Fund which has a balance of $44,000,048, and the Budget Reserve Fund which has a balance of $130,257,559. The combined balance of these two funds is $174,257,607. We are monitoring revenues actively to determine if those reserve funds will be necessary to balance the budget in the current year.

Based on what you have seen, what is the approximate range of shortfall that could happen to May collections for April sales and use tax?

Quasney: The current situation is unprecedented for revenue estimators. Models are most accurate when describing how the economy and revenues normally behave. This is not a normal time, so estimates are highly unreliable and volatile. As more data becomes available, we will be able to better estimate the ongoing impact of the pandemic.

Has the governor suggested dates for a special legislative session?

Quasney: No specific dates have been discussed at this time.

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