Don’t put all your eggs in one basket
Diversify revenues to properly fund county government and build reserves
By Eddie A. Jones, AAC Consultant
In the formative years of our country Benjamin Franklin said, “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.” There is a reason for the truth in the last part of that quote. God said, “It is appointed unto man once to die.” Must be true. Secondly, we all want to live in a civilized society which must be paid for — thus “taxes.”
Much more recently Jill Lepore, an American Historian and professor at Harvard University said, “Taxes well laid and well spent ensure domestic tranquility, provide for the common defense, and promote the general welfare. Taxes protect property; taxes pay for roads and schools and bridges and police and teachers. Taxes pay for hospital and nursing homes.” How true. Taxes pay for those things we desire and demand that government provide. And property taxes at the local level are “well laid and well spent.”
The year 2020 has been a year like none other. None of us has experienced a year like this due to the world-wide coronavirus pandemic. When much of the economy was shut down or restrained due to social distancing, stay-at-home recommendations and some types of business shutdowns several sources of county revenue started declining. Counties were forced to lay off or furlough employees, cancel projects, defer construction and maintenance and more: While at the same time, in many instances, increase spending in some areas for Covid-19 related expenses.
Depending on a county’s economic base, some counties have fared better than others. And those that did the very best were those that had a good diversified revenue stream and a decent level of reserves that could be used to lessen budget cuts and still maintain an adequate level of service to their constituency.
Someone once said, “Good lives are lived in the margins of hope and possibility.” Apply that to the life and operation of a county government. Without some level of financial reserves the county has little hope or possibility during an economic downturn or recession.
Recessions are events with big-time consequences for tax growth rates and revenue totals. County government in Arkansas is somewhat more insulated to damage than state government but still experiences declines in revenue.
Arkansas state government is hit hard because consumer spending and retail sales fall, decreasing the growth and collection totals of sales tax — especially since the state sales tax does not apply to groceries.
Higher unemployment and fewer work hours result in reduced income from personal earnings which, in turn, slows the growth in state income collections. During a recession many types of corporations see a decline in profits, which reduces the state’s corporate income tax collections. No county in Arkansas levies county income tax, although state law permits counties to levy a tax on the income of its individuals and businesses through a vote of the electorate. [§ 26-73-101 / § 26-73-109] To my knowledge no Arkansas county has ever exercised this option.
The state of Arkansas funds the highway and bridge program primarily with fuel taxes. That is a tax that has seen severe reduction during the pandemic as travel was somewhat restricted and people were urged to stay home. Fuel taxes cannot be levied by county government.
So where does that leave county government in times of recession? It is not that we are unscathed but we have different types of revenue and therefore are affected differently than state government.
County government has become increasingly dependent upon sales tax over the last 30 years — a tax that is very sensitive to an economic downturn. Yes, the county sales tax declines during recessionary times — even if not at the same rate as the state sales tax since our sales tax is applicable to grocery items. We better thank the good Lord for that. In some of our smaller counties the sales tax on groceries is a large percentage of their sales tax receipts.
Other sources of county revenue that are affected during a recessionary period are user fees; fees charged by county officials for certain services as set out by law; court fines, especially in a pandemic like we’ve had when court sessions were practically nonexistent; and, of course, state revenues received by counties.
Arkansas county government has a longstanding agreement with the state concerning the distribution of highway revenue taxes and this agreement is codified in law. The state gets 70 percent and the other 30 percent is divided equally to counties and municipalities. As I mentioned earlier, the sources of highway revenue are various fuel taxes and a one-half cent state sales tax. Both were heavily affected during the pandemic-produced recession, and all 75 counties took a sizeable reduction in highway turnback dollars. Wow, that hurts. Arkansas counties have around 50,000 miles of county roads while the state of Arkansas has 16,382 miles of state highway.
According to law, “a county is a political subdivision of the state for the more convenient administration of justice and the exercise of local legislative authority related to county affairs.” We receive “county aid,” or as most of us call it “general turnback” from the state to help cover the cost of state services administered at the county level. This source of revenue does not come close to covering the costs, but it helps.
However, when the state suffers revenue loss counties share in that loss many times. The legislature met in special session in March and reduced the state general budget for the final quarter of their fiscal year, which ends June 30. Counties suffered a 12.59 percent reduction in FY 2020 general turnback. Then in April the legislature convened for the even numbered year Fiscal Session to enact the budget for the state FY 2021 — July 2020 through June 2021. We took a 15 percent reduction in general turnback in that budget.
The good news is that it could have been worse, but the state of Arkansas had reserves that helped buffer losses. That brings me to my two-pronged reason for this article: (1) the most stable source of county revenue; and (2) the urgent need for counties to build reserves, especially general reserves.
- The effect of a recession on revenue collections often translates into one or more of the following policy alternatives:
- Change the tax structure to rely less upon recession-sensitive taxes;
- Raise the tax rate to increase tax collection totals;
- Cut expenditures to match available revenues.
Something counties have unwisely done on occasion is borrow funds (debt financing) to cover the difference between available revenues and expenditure commitments. By the way, that is illegal for Arkansas county government. Counties are prohibited from paying interest except for bond issues and short-term financing through Amendment 78. And the short-term financing option is available only “for the purpose of acquiring, constructing, installing or renting real property or tangible personal property having an expected useful life of more than one year.” [Arkansas Constitution, Article 16, § 1 and Amendment 78, § 2]
So what is a county to do? I suggest a combination of the policy alternatives listed above. The first thing a county must do is make the tough decision. Cut expenditures to match available revenues if you don’t have adequate reserves. If you face large cuts, more than likely the cuts will include personnel.
Next, evaluate the county’s tax structure. Many counties are relying too much on sales taxes that are recession sensitive. It’s like the old adage, “Don’t put all your eggs in one basket” — meaning if you rely too much on one resource, if it fails you have no alternative. The key word here is diversify; don’t put all your eggs in one basket.
What’s not sensitive to recession — or at least much less sensitive? Property taxes. The property tax is the most stable source of county revenue. The reason is that there are consequences to not paying property taxes. You can’t get your vehicles licensed if you have delinquent personal property taxes. If you don’t pay your real estate taxes your property will be certified to the state of Arkansas after a year, and if you don’t redeem your property at the state level after a set period of time by paying the delinquent tax, penalty and costs your real estate is sold. You can count on property taxes being paid.
By the way, Snoopy was wrong. He was barking up the wrong tree when he wrote saying, “Dear Tax Collector, I am writing to you to cancel my subscription. Please remove my name from your mailing list.” That’s not how it works.
When you own taxable personal property and/or real estate, it is assessed; goes on the tax books; a tax statement is sent; and property taxes are collected and distributed to the proper tax entities.
Property taxes in Arkansas are some of the lowest in the country. Property taxes are at the top of the list when it comes to stability in revenues. You don’t have to be greatly concerned about volatility. Except for bonded debt, county property tax rates are constitutionally set at 5 mills maximum for general operations and 3 mills for road operations. These are low rates but unlike municipal taxes or school taxes that apply to properties in a smaller jurisdiction the “county general and road millage” apply to the full assessed value in the county. So why on God’s green earth do Arkansas counties not take maximum advantage of this rock-solid revenue source?
The most common answer is that property tax is the most hated tax. For many that’s true whether or not their dislike is properly founded. Why so unpopular?
It’s not unpopular for good economic reasons. It’s unpopular for one simple reason: It’s the only tax left on the books for which people have to write a big check.
Income taxes and Social Security contributions are withheld from paychecks before the recipients get their hands on the money. Sales taxes are collected little by little as people make purchases, and the taxes are remitted by merchants and other business. It’s only with property taxes that a regular person gets a tax bill and has to pay it. However, many homeowners’ property taxes are bundled into mortgage payments and thus a bit less obviously visible. The truth of the matter is that the majority of people pay much more in income tax and sales tax than they do in property tax, but they do it a little bit at a time.
Guess what? An individual tax payer is not required to pay the full amount of current tax all at one time. They can make installment payments. The first installment of one-quarter of the amount due is payable between the first business day in March and the third Monday in April. The second payment of one-quarter is payable between the third Monday in April and the third Monday in July. And the third payment of half is payable between the third Monday in July and Oct. 15. Even better, the county collector is authorized to take installments of current real and personal property taxes in any amount from the first business day in March through Oct. 15 with the balance due by Oct. 15. [Ref: § 26-35-501]
Only 26 counties in Arkansas, barely over one-third, have maximized the county millages by levying a 5 mill general tax and a 3 mill road tax. There are another 13 additional counties that have maximized the general millage and 8 counties that have levied the full 3 mill road tax. That calculates to 47 counties, almost two-thirds that can increase county property taxes — 21 that can raise either general or road and 26 counties that can increase both general and road.
Counties, it needs to be done. It should be done to secure a solid source of revenue that can be depended on even in the tough times like we are experiencing this year.
It is a difficult and tough decision to make. I fully understand that, but the time is now. Make plans as you look toward budget time this fall.
British Prime Minister Winston Churchill said, “There is no such thing as a good tax.” Yet, he completely understood government could not operate without them. Arthur Vanderbilt was so bold as to say, “Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden.” I cannot disagree with that. And everyone in county government knows that it takes more money to operate than you thought it did before entering the arena. When you step inside you soon find out all the obligations of county government.
I know and understand, as much as anyone, the tightrope you must walk in increasing taxes, especially property taxes. Here is a spot-on assessment of this type situation put forth by Jean Baptiste Colbert, the minister of finance for France under the rule of King Louis XIV. He said, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
In other words, you do it professionally with complete transparency. You prove the county’s financial plight; you paint the picture of what a county must fund by law and the strain that puts on your limited resources; you explain how the increased tax is needed and how it will be expended; and you provide a good example of how the tax will affect them. And if you are one of the many counties in Arkansas that does not have reserves — or very little — you need to explain the dire need to accumulate adequate reserve funds and why.
The amount of dollars needed for a county budget can vary greatly from year to year. Saving for future projects, acquisitions, and other allowable purposes is an important planning consideration for county government. Reserve funds provide a mechanism for legally saving money to finance all or part of future infrastructure, equipment, and other requirements. Reserve funds can also provide a degree of financial stability by reducing reliance on indebtedness to finance capital projects and acquisitions. In uncertain economic times, like we are in, reserve funds can also provide officials with a welcomed budgetary option that can help mitigate the need to cut services. In good times, money not needed for current purposes can often be set aside in reserves for future use.
In addition to reserve funds, maintaining a reasonable amount of undesignated fund balance within operating funds is another important financial consideration for county government. A reasonable level of unreserved, unappropriated fund balance provides a cushion for unforeseen expenditures or revenue shortfalls and helps to ensure that adequate cash flow is available to meet the cost of operations.
Combining a reasonable level of undesignated fund balance with specific legally established reserve funds provides resources for both unanticipated events and other identified or planned needs.
Two things I suspected were confirmed this year while working with numerous counties during the pandemic-induced recession: (1) many counties are suffering from anemic revenue levels, which produce anemic budgets; and (2) many counties have very little or no reserve funds and no unappropriated general or road fund balances.
I suppose taxes are not popular, but they are necessary. I’m on the same page with Mark Cuban, the American entrepreneur, investor and owner of the Dallas Mavericks. He says, “While some people might find it distasteful to pay taxes, I don’t. I find it patriotic.” Paying taxes in my home county of Randolph gives me a feeling of responsibility, of being a part of the fabric of my county and community, of contributing to the common good.
It is time for the counties that have not done so to do it — maximize your general and road millages for the good of the county or at least start on that forward path. The property tax is a progressive tax, not a regressive tax. Many of your constituents would be affected very little. Here’s why. Without going into great detail, Arkansas taxpayers are eligible for an annual tax credit up to $375 against the property tax on a homestead. Many people own a home where the tax on the homestead is not even $375 or only slightly over. The county gets the value of the credit from the State Property Tax Relief Fund. There are other provisions of Amendment 79 that help keep property taxes from jumping immensely at one time such as limiting the annual increase of assessed value after a reappraisal and freezing the assessed value of the homestead of a disabled person or a person 65 years of age or older.
The property tax is the available tax base that offers the greatest promise for effective local fiscal decision making. Take the bull by the horns and do what is necessary to properly diversify your revenue sources so that you are not so reliant on volatile sources of revenue and at the same time start building needed reserve funds. In sum, the property tax is a stable, adequate, and reliable source of county revenue. Maximize the county millages, and it keeps you from putting all your eggs in one basket. Don’t fiddle around like Nero did. Remember what happened to Rome?