As the U.S. Congress finalizes the controversial tax reform bill, the consequences of the massive tax overhaul are about to be felt in the West due to a reliance on oil, gas, and coal royalties from public lands.
The reason? The final reconciled bill does not allow for complete funding of the federal government’s budget, even though congressional Republicans argued that economic growth, stimulated by the tax cuts, would offset the cost of the tax reductions. Most analysts who have looked at the long-term implications of the 708 page tax bill (House Version) are more than a little concerned. One was David Damschen, the Utah State Treasurer.
“When the prospect of triggering the Paygo Act in future was raised a couple of weeks ago, Senator Hatch readily dismissed the concern. I’m very much still concerned, but haven’t had a chance to hear the Senator or his staff elaborate on his source of confidence,” Damschen said. When Utah Political Capitol contacted Senator Hatch’s office on this point, his staff was confident that the PAYGO situation would be addressed. No one seems to know if that will be prior to the holiday recess or under the order of business in 2018.
Some Background on PAYGO (with link)
The reason why David Damschen and others are so concerned about the bill (scheduled for a vote on final passage on this date) is because of a 2010 federal law (PAYGO) which would mandate across-the-board budget cuts – this is very likely going to be acheived by suspending federal royalties on extraction revenues slated to go to the western states where so much public land is in play by energy companies.
That 2010 “Pay-As-You-Go” law applies when Congress approves a deficit-increasing measure, which the current tax reform bill represents. All states are about to find out if Congress will allow this problem to happen, and all will be impacted in some manner.
Real (and Recent) Problem for Local Governments in the West
Montana, New Mexico, Utah, and Wyoming are all reliant on extraction royalties and each has had their budgets hit hard by falling energy prices alone. One county in Utah had to increase property taxes by a staggering 73 percent to make up for the net loss when extraction revenues and bonds dependent on them, were shifted as resources were tapped to an adjacent county (Sevier to Sanpete).
The Republican-led tax bill also comes with other impacts, like cuts in local and state income tax deductions for individual households. The overall effect will be felt in the west most prominently.
U.S. Senator Jon Tester, (Democrat-Montana) released a statement saying that “triggering these [tax] cuts will put state budgets in the red and critical public services on the chopping block.” Tester denounced “sweetheart deals to corporations, [via this federal tax overhaul] that cost our state tens of millions of dollars.” Montana faces a $227 million hole in their two-year budget cycle, about half of which comes from the Senate version of the tax overhaul bill about to be signed.
Washington Post and other media reported in November that under normal circumstances, “Senators and Representatives simply add a line to a bill that says PAYGO doesn’t apply but Republicans can’t do that under reconciliation. (note: “Reconciliation” is a legislative process of the United States Congress that allows expedited passage of certain budgetary legislation on spending, revenues, and the federal debt limit with a simple majority vote in both the House with only 218 votes and the Senate’s simple majority of 51 votes) Instead, to get around statutory PAYGO, Congress would have to pass a separate bill from the tax legislation.” Such a plan would need 60 votes to pass the Senate (as opposed to the 51 for the tax overhaul) …and plans to do so have not been made.
At year’s end, many of the state’s western, rural counties are finalizing their budgets under the legal requirement to balance anticipated outlays with expected incomes from property taxes and other revenue sources. Some are not guaranteed, causing many to call their lobbyists on numerous occasions.
Earlier this week in a press conference with rural Utah reporters, Governor Gary Herbert stressed several recurring themes that are also scrutinized by some in the shadow of recent decisions by the Trump administration and a Republican-controlled Congress. Federal Republican’s effort to “broaden the base and reduce the rate,” when it comes to tax reform is a common talking point discussed on Utah’s Capitol Hill. Locally, critics chided such tactics and maintain that increasing taxes on food (floated during the 2017 state session) and the “indexed” gasoline sales tax wouldn’t be enough, even though many gave the Utah Republican legislature high marks for raising taxes in a manner that would seem almost invisible to those paying them.
Anticipated Travel and Tourism as an Economic Driver
Governor Herbert stated that Utah’s 14 ski resorts are rethinking their marketing approaches in the light of insufficient snowfall and a season that no longer sustains a winter recreational model, historically one of the state’s economic mainstays. “Their impact is more than $1 billion dollars annually,” stated Herbert, “and their plans to develop year-round recreation in the form of golfing, hiking and other activities will help to sustain that sector.” The Governor went on to cite 8 resort locations that have invested “50 to 60 million dollars in conservation efforts,” intended to shore-up their anticipated decline in winter revenues. The sales tax revenue projections are still being evaluated due to lack of snow at the beginning of the year.
The PILT Challenge
Rural counties with smaller populations surrounded by public lands rely on federal subsidies referred to as “Payment in Lieu of Taxes,” (PILT). This is a way that the federal government can return tax monies to those areas with fixed costs in providing governmental services but have insufficient populations to make their budgets break even. The problem with this, the Governor maintains, is how the formula is applied for these payments. “Utah County, with its population size, gets a disproportionate amount of the PILT funds, whereas a fair formula would allow for better distribution,” Herbert said.
The population factor in the formula that the Governor cites is only part of the PILT problem. Commissioner Garth Ogden in Sevier County confirmed that his county’s 2018 budget reflects some PILT revenue ($1.9M). These funds are uncertain. Congress has been increasingly stingy with PILT payments versus their authorizations.
“Congress authorizes $X per acre, which can typically be $0.10 per acre in areas heavy with public land but then [Congress] fails to authorize that full amount,” Gov. Herbert said. “Instead of $X per acre, we might see 50 percent of that amount.” He continued, saying that “Obama didn’t even put that [PILT funding] in his budget,” failing to also indicate that Congress actually did.
CHIP and other Healthcare Funding
One area that Utah’s governor is completely qualified to review is the state’s response to the ongoing healthcare budget and his own effort to obtain further Medicaid expansion. During the extensive debate on Medicaid expansion, Herbert’s state was among those not opting for the deal offered by the Obama administration. Their lawmakers felt it was unsustainable. Presently, the Children’s Healthcare Insurance Program (CHIP) has been unfunded by the federal government since September and that compounds some of Utah’s economic concerns. For several years, Governor Herbert’s administration has grappled with the numbers representing those residents who do not have any healthcare, while other states like Arizona (under Republican Governor Jan Brewer) took the offer of expanding Medicaid under the Obama administration. Recently and amidst great fanfare, a waiver was obtained to help cover only less than one-tenth of those without insurance who would normally be covered by Medicaid, who earn too much to qualify but not enough to apply for coverage under the dwindling Affordable Care Act.
Utah Cannot Access the Same Red Ink
During the press conference with Herbert last week, a reporter specifically asked about revenues to western states and if they had been discussed at the recent Western Governors’ Association meetings. The WGA, in a policy resolution, had taken a position that the federal government has no discretion over this royalty money and that payment to the states is obligatory. Due to time constraints, nothing was noted in the press conference about royalty payments and the fact that Wyoming faces a reduction of last year’s $664 million payment from extraction on federal land.
Utah’s state budget (link) is legally obligated to be balanced every year, prompting some speculation that Governor Herbert’s announcement of education funding is in jeopardy already. The PAYGO situation represents one of the major and imminent “unintended consequences” of the federal tax overhaul.
The Utah Legislature, which creates the final budget for the state with gubernatorial approval, begins their 45-day session on January 22.
Ed Note: At the time this article is going live, the U.S. House of Representatives has voted 227–203 to pass the $1.5 trillion GOP tax cut package. Democrats have cited a procedural, parliamentary problem which may delay the bill’s passage further.