$36 and Change: A Tax Talk with Lieutenent Governor Matt Michels
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Mitchell Republic

Every time I sit down to balance my checkbook and pay my bills, I sigh and remind myself that "times are tough." Maybe you have the same struggles. And yet, I'm keenly aware of how many people are less fortunate.

Conversations around money (in our personal budgets and in state government) are often tinged by fear and uncertaintly. As we embark on a new fiscal year in the state, we invited Lt. Governor Matt Michels to take the mystery out of money by breaking down the state budget.

May your kitchen table conversations about cash flow reflect the values you live by every day.

Listen to the entire conversation here

So, let's talk about the state. Let's talk about the fiscal challenges,  highlights, and opportunities here, as we look at the new fiscal year.Is there anything that jumps to mind first, as sort of challenges to the state's financial picture as we look at the future?

I think the main thing that I am really proud of in our state is how we've collectively worked together, and the individuals who evaluate states have said that we're one of the best 12 in the nation by AAA status, and a lot of that has to do with the predictability of how we run our state with our legislators, and the way that we're required to have, constitutionally, a balanced budget, and to have it done at a specific time.

We have so many other states that have economic issues that they can't resolve, and they just keep kicking the can down the road, whether it's the New Jerseys or  Illinois, or California, and they just continue to extend it.

Now, we're all human--we work on deadlines, and the way our deadlines are set is, we have to be out of here [session] by a certain period, and we can't have extensions, and that's different than a number of other states.

So, one, we get it done. Candidly, we all have to cram for an exam. Two, we're, obviously, always analyzing our revenue picture and what it is, the demands of the people are for those funds to serve governmental purposes, and then three, to continue to assess it as it relates to long-term health, even with economic downturns.

I think people who wouldn't pay attention to this would be surprised, but July 1 is the beginning of a new fiscal year. A lot of us operate on a calendar year, because we do our taxes on a calendar basis, but for state governments, we're all  July 1. Federal government's a whole different story, which would take about a five hour conversation.

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So, the New York Times did a piece over the weekend about state governments who are having those challenges, and many of them had a strong governor that was from the same political party that the lawmakers were, and they were still having problems.So, in our state, it's not necessarily just that we have a super majority in the state house, and then also a republican governor. It goes deeper than that.

It does. I mean, I think that, first of all, it goes to the fact that we're able to keep track of our revenues, and we don't over spend, and when the governor and I came into office, we had just been coming out of a recession, but we were in a situation where we, potentially, were over promising, and we needed to cut [spending], and if we look at our neighbor in the west, Wyoming, they immediately came out of the gate and said "Because of the downturn in the coal severance taxes, we're going to cut everybody 22%."

When we cut 10% that was horrendous enough for people to absorb, but the fact is, is that we've gotta manage with the income we have, and that's how we've been raised, and that's what our constitution requires, and that's, now, what the rating agencies have said. That we've gotta live within.

So, let's talk about, you know, sort of, South Dakota taxes for dummies. Tell us where the money comes from. How  the tax structure sort of works, and then we'll talk about where it goes.Where are we collecting from?

Well, first of all, I'm glad that you asked those questions, because a lot of people don't and assume that it's significantly different than your home or the business life that a lot of us are involved in. It's really not. I mean, the numbers get bigger, but I can tell Lori's or Matt's priorities by looking at our bank statements.

We can see where our income is coming from, and I need to have a home. I like air conditioning, so I'm paying electricity right now, and I've got gasoline, and a car payment. So, you've got all of that matching up. So, it really isn't any different, and how I explain it is, that we have a budget of 3.6 billion dollars, so that's hard to get your head around, so I say it's 36 dollars.

So, if my wife, Karen and I, are sitting around the table, I'd say "Honey, we have $36.00 of income. Of that $36.00, $16.00 of it is produced by activity here that we're creating," and that's in South Dakota sales tax. So, about 62% of that, or, you know, close to $10.00 of that is sales tax.

A number of other states that you're seeing having problems, that's coming from income tax, and you see high highs when there's good revenues, but then they crash, like the issues in New Jersey and Illinois.

But, we also have income from lottery, and from insurance, and bank taxes, alcohol and tobacco, and contractor's excise tax, which is for constructing things, and that's what really makes up our $16.00, but the vast majority of it is our sales and use tax.

What we see there is some pressure that, if I continue to use my family example, that we're just not making as much money, because people are not spending as much for a lot of reasons. There's some online things, and we negotiated a deal with Amazon, but there's still a lot of other purchases that people make that we don't capture, but we're just seeing a new normal, as they say in the seminars these days, where people aren't spending as much, and some of it's tied to the agriculture economy, but we're just not seeing the growth we have over the years. And so that's why, the current budget that we're just starting is really, almost just a zero growth budget over the prior year.

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How challenging is it to predict sales tax and what those revenues are going to be, because you’re basically predicting what people are going to spend? You're predicting human behavior.

It's very challenging. In fact, when you say a budget, it's really an estimate, and those estimates are continuing to be reevaluated. A year ago, we were way off, so we had to recalculate during the legislative session, seeing what we could handle--and we'll be doing that again.

But, the one thing that is pretty important is that out of that $36.00-- going back to that analogy--$16.00 of that is, you know, revenues that we're making ourselves within the state. We get over almost $12.00 from federal government, or 1.2 billion from federal government contributions to programs. So, it's pretty hefty, and then the other $8.00, or 800 million, is from what you [the people] did.

You went to Custer State Park, so you bought a tag to go in there, a park license, or if somebody went fishing this weekend, or somebody's day is filing a lawsuit. It's money for services, or, you know, user fees, but then we say "Okay, well out of all of that money, what is it that we spend it on?"

Our priorities are really, really simple, and they are hard to adjust because of the demands that we have, and close to 35% of it's taking care of our schools, and that's close to 600 million, right off the top, and that includes, thankfully, the sales tax increase that we had a year and a half ago, which we wouldn't have been able to get done this year at all because of the economic situation. So timing was everything there, and the courage of the legislators, and the people who supported that education increase are very, very valuable, and we've seen less openings, by the way, coming into the fall of individuals who have retired, and we're just seeing a nice migration of people who want to teach, or [want to] stay here teaching.

Right there where you're at, the university, we spent about 13% for the Board of Regents system. So that's about 208 million, and then health and human services is almost identical to what we contribute of the people's money to schools. So, health and human services is taking care of people who are in need, the poor, people at the human services center that have behavioral illnesses, people in our communities that are being cared for by adjustment training centers with developmental disabilities, and people up in Redfield, who are in the Redfield State Facility, and those individuals at our community behavioral health centers.

So, all of that really, chews up 3/4 of our budget. I think it would surprise people that, really, our prison system is 6% of our budget, and our judicial system uses only about 3%.

So, I've been throwing a lot of numbers out there, but I will tell you that these shares, just like in our homes, are relatively static. In your home you need to pay for the cost of living, and, essentially, this is what the people have demanded, and from our first day in the legislature, it's been very similar.

View the 2018 South Dakota State Budget here

When you look at that in a pie chart, Lieutenant Governor, then we're definitely heavily invested in our schools over building jails, for example. So, the old adage, or maybe cliché about building more schools than jails, certainly applies in our state, if you look at the pie chart anyway.

So, let's talk about that $12.00, or 1.2 billion dollars as it were, from the federal government-- where's that money flowing into?

Most of that are our batches under medicaid, and then there's also [money] for the military, so we have a lot of federal money that comes directly to the state for our jets, and our support infrastructure and personnel, helicopters, et cetera, and all of that equipment.

So, we get those kind of, what I would call federal programs, we obviously get federal gas tax for roads, and all those initiatives, and then federal money for programs like assistance to needy families, and programmatic funds that come in for jail services and corrections systems.

I think that one of the things that is very, very difficult for the governor and I--especially in light of what you've covered and providing care for the poor in Medicaid is--we do provide about a fourth of our Medicaid budget, about 100 million to care for individuals when the federal government should be caring for 100%, and that's through the Indian Health Service.

That's a whole other topic, but it's the number one priority of the governor and I, and our congressional delegation to at least get those funds, you know, realigned.

3.6 billion dollars is the daily deficit our federal government has. So, I'm going to put this in a different way. The federal government overspends our state annual budget on a daily basis.So, we are very, very cautious, and cognizant of the fact that we are just a budget speck, we're not even budget dust, we're like a neutrino, or subatomic particle.

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So, give me an idea--how closely, then, do you watch tax reform conversations in congress, and how might some of those changes that the republican party is currently proposing, impact the state of South Dakota? How do those roll down?

Well, since we are a manageable state and we're nimble, we are really blessed to have great communications with our congressional teams, and not only are they friends, but they have been involved in governance. Like Governor Rounds, Christie has obviously been in the legislature, and John understand the inner workings of what our priorities are, having lived here, worked so hard for us, and we're just really blessed that we've got great, great communication.

The other thing, is that the governor's part of a ten governor work group that was put together by the National Governor's Association on the issues of healthcare reform and tax reform, because they're intertwined.

So, for example--when I'm done talking with you--the governor, our team and I, are talking for the next hour and a half, just about this topic, what's happening in the recess, and what we're hearing. Just kinda comparing notes from our respective discussions.

So, we watch it very carefully. We've got great intel. By the same token, I think the same things that you cover are the same things that we understand, and that is, if somebody says they know how this is going to end, they're not telling you the truth. We do not know, but we're ready to react, and that's, as you know from our military experiences, the best battle plan is to make sure that you can always realign it and change it.

The sales tax increase that was designated for teacher pay, you kind of mentioned some of the impact of that already, and maybe fewer vacancies, or some of those positions being filled more easily. It takes some time for that to all play out.What about the property tax relief that was tied to that? How does that play out for home owners?

You know, that's coming. We took part of the agricultural property tax relief to fund a testing lab for animals, but the other is being baked in as we receive it now, for these taxes this year that are due next year.

So, people are seeing that in their taxes that they need to pay for next year. A lot of people think that it's a tremendous amount of money, but it's really reducing, sometimes, the growth, hopefully, and we're seeing that, and the impact on it is very, very good.

I would ask our listeners to--and I say this to people who work for us-- whether they're in-state employees or they work in the cities, or they're working for South Dakota Public Broadcasting, or they're teachers, that there's an interrelationship here that I need to make a pitch for, and that is, I buy things online. There is no doubt about it, but I buy things online where my sales tax is being collected, and I'm paying it, and being remitted.

So, one of the first was iTunes, and I downloaded an album, Mike and the Mechanics the other day, because I love Mike Rutherford, and there is a sales tax on that, that goes to my hometown at Yankton and to my state, and we need to be cognizant of that when we're buying those things. That this is the environment we're in, and so if we're supported by, if we're a teacher or we're working in cities that have a  retirement system, and our retirement system is doing well, then we should think about that it really is our responsibility to also remit those taxes, and to buy from online people, buy at home, preferably buy in your communities, but if you're going to go online, at least, we implore you, choose vendors that the sales tax will be charged.

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Let's talk briefly about the race for governor in 2018. As we start hearing from the candidates who are running, what sort of things should we be listening to when we talk about how someone's going to run the state from a financial perspective? What are those smart questions, without getting into how they might be answered by individual candidates, or what their personal experience might be, but as voters, as citizens, what are we looking for to really sense how somebody feels about balancing the budget in a way that, you know, keeps things as they are, or keeps things in a different direction that someone else who's voting might want them to go?

Well, I've been blessed to get to know you, and vice versa. I know this isn't going to surprise you, but I think that any individuals running for office now, that the people that are communicating with them, should continue to implore, and support, a civil discourse.

We are not seeing that on a national level, and it's very possible, if Lori and I talk for two or three hours, that you and I are going to agree on a few things, and disagree on many. It doesn't mean that Lori isn't a good person, and isn't a friend. The way we've got to continue to keep people involved, and we do it to our legislature, and I think it surprises a lot of people, especially our interns, that there isn't acrimony, there aren’t people pointing fingers and saying bad things.

We certainly get tired, and we disagree, but we're not disagreeable. We're citizens and there are people that are dying for us, as we speak, to be able to self-govern, and that doesn't mean that we have to be hateful and disrespectful, and that is one thing that I always ensured as our son grew up through this process, and other people have seen it, that they know that, that is not how we should govern.

And so, I ask people to not support negativity. That doesn't mean that you can't ask hard questions, but to be disrespectful, to use hateful language, to use social media to be anti-social, I just respectfully request that we demand it of people who are running for office. That we treat each other that way, and continue to have the respect for individuals, regardless of their beliefs and backgrounds, and try to understand each other. It's the only way we're going to continue to build that out.

So, to build out our relationships, and to trust these individuals who will lead us in the future. As it relates to, I think probably the Navy saying is the biggest sea change that we're going to see, and Dennis and I talked a lot about this-- the changing view of what a state government, and a federal government should do. What is it that we can do when the federal government, essentially, will send a block grant? In other words, here's your funds, you deal with it on your own. What is that kind of vision?

With that being said, I will finally say, without getting into specifics, find a candidate that you really, really wish to support and get involved. It's the biggest party in this nation. The largest political party in South Dakota's the apathetic party.

Let's get people involved, get in the parades, ask the tough questions, and the world's run by those who show up. So, show up, and ask those questions that are important to you. It might be important for a lot of people. What we're going to do about the fishing in the northeast, but it's very important to people in the southwest as to what uranium does.Be parochial, and what I mean by that is, get your issue out there.