State budget planners will count on phantom revenue streams this year

State budget planners will count on phantom revenue streams this year
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State budget planners around the country thought they would be getting a Christmas bonus six months early in 2018. When the Supreme Court ruled in South Dakota versus Wayfair that online retailers with significant sales within a state were fair game for sales tax liability, states scrambled to take advantage. Legislators quickly built rosy revenue projections from online sales taxes into their budgets, and they adjusted their planned spending accordingly. The only problem? Those revenue projections are likely too rosy, and now some states are in danger of being left in the red.

Minnesota is one of the states learning that lesson the hard way. Erin Murphy, a state representative and gubernatorial candidate, proposed using the impending online sales tax “windfall” to fund broadband access grants. But the revenue boost she estimated at between $132 million and $206 million ended up being well off mark. Revised estimates now place the revenue bump at a fraction of those initial estimates. Even worse, the state will still see a shortfall in overall sales tax revenue, which means that online sales tax revenue only makes the budget deficit somewhat smaller.

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States cannot blame bad luck for inaccurate projections. There was fair warning that the expected revenues were going to be meager. The Government Accountability Office estimated that expanded sales tax authority would increase state revenues by less than 1 percent of total state budgets nationwide. On top of the modest nature of the revenue projections, these budget forecasts are just that. They are almost as reliable as estimates for how much snow a storm will bring, so taking a guess at how much new revenue will come in and planning to spend every dime of the increase can blow up if the forecasts are off.

Other states have handled the revenues they expect more responsibly. Wisconsin and Utah, for example, built in tax cuts to their legislation that fluctuate based on actual revenue received. Should revenue from remote sellers exceed projections, the tax cuts will be proportionally larger and vice versa. Tax cuts are also a logical means of redirecting what revenue boosts do actually take shape. After all, any revenue that comes from increased sales tax authority comes at the expense of Minnesota citizens and makes the state a less attractive place to do business for companies.

There are other concerns about the Wayfair decision as well. It represents a substantial tax collection burden for small and midsize retailers around the country. While larger online retailers such as Amazon or Walmart were already remitting these sales taxes, most smaller online retailers were not. Thomson Reuters estimated nearly two months after the Wayfair decision out that just 8 percent of midsize firms were prepared to deal with the added complexity of remitting sales taxes to nearly four dozen states.

But even if states decide to go ahead with “economic nexus” legislation, it behooves them to do so in a way that will not leave them scrambling to balance their budgets through other means when the optimistic revenue projections prove to be off. As citizens know, when revenue fails to meet spending goals, budget planners usually think the solution is more taxes.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit focused on tax policy education and analysis.