Revenue losses coming into focus for cities, states, transit systems

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State and local governments that rely on sales tax to maintain services are beginning to get a clearer picture of how deeply they must cut after the two worst months of revenue losses in 2020.

"As the coronavirus outbreak slows the national economy, local governments that depend on income and sales taxes are seeing immediate revenue losses," said Moody's Investors Service analyst Frank Mamo. "Cash will be critical in managing budget gaps over the next year, while localities with weak reserves will likely need to cut their budgets or rely on external support."

Kroll Bond Rating Agency anticipates losses of $690 billion for state and local governments and agencies through June 30, 2021. States are expected to lose $370 billion, while cities see $117 billion of losses. Counties will miss out on $114 billion while transit agencies lose $24 billion.

“It remains to be seen how much of the estimated revenue losses will actually be experienced by state and local governments, and whether these reductions will be permanent or simply deferred into later periods,” Kroll said in a June 9 report.

“The effect of COVID-19 containment measures on retail sales may create pent-up demand that will be realized in later periods when economic activity resumes. To the extent unemployment persists, however, some amount of the deferred sales tax may become permanent.”

One of the most sales tax-dependent states, Texas, reported a steep drop of nearly 12% in local sales tax revenue for May with transit systems taking a 17% hit. The April report showed an overall drop of 5% for all local governments and 8% for transit. Those reports covered sales for the months of March and April.

“It could have been worse,” said Noe Hinojosa Jr., chief executive of the financial advisory firm Estrada Hinojosa & Co. “Urban cities lost more than suburbs and bedroom communities but definitely tourist cities, big college towns and oil and gas producing regions felt the pinch more.”

In Oklahoma, State Treasurer Randy McDaniel reported a 14% drop in May revenue collections.

Gross receipts for May total $923.1 million, down by $150.5 million from May of last year.

“The Oklahoma economy, as reflected in state revenue collections, was significantly impacted by the pandemic during the month,” McDaniel said. “However, the picture in May is not as conspicuous as the April report, which included the postponement until July of income tax reporting."

Sales tax and gross production receipts were substantially lower by a combined total of $106.1 million.

Sales tax receipts, including remittances on behalf of cities and counties, fell by more than 12% over the year. Gross production collections were down by almost 60% compared to last May.

May gross production tax receipts are paid on crude oil and natural gas production during March, when the price per barrel of West Texas Intermediate Crude Oil at Cushing averaged $29.21. One year ago, the average price was $58.15 per barrel. Meanwhile, natural gas prices fell by almost 40% over the year.

Total gross receipts from the past 12 months are $13.07 billion, off by $477.1 million, or 3.5%, compared to the previous 12 months. Shrinking income, sales and gross production tax collections exhibited the most downward pressure during the period.

The unemployment rate in Oklahoma was reported as 13.7% in April, up from 2.9% in March.

May gross collections total $923.1 million, down by $150.5 million, or 14%, from May 2019.

Gross income tax collections, a combination of individual and corporate income taxes, generated $289.2 million, a decrease of $15.7 million, or 5.1%, from the previous May.

Individual income tax collections for the month are $279.2 million, up by $7.2 million, or 2.6%, from the prior year. Corporate collections are $10 million, a decrease of $22.9 million, or 69.5%.

Combined sales and use tax collections, including remittances on behalf of cities and counties, total $424.1 million in May. That is $44.7 million, or 9.5%, less than May 2019.

Sales tax collections in May total $362.3 million, a drop of $50.5 million, or 12.2% from the same month of the prior year. Use tax receipts, collected on out-of-state purchases including online sales, generated $61.8 million, an increase of $5.8 million, or 10.3%, over the year.

Gross production taxes on oil and natural gas total $38.3 million in May, a decrease of $55.6 million, or 59.2%, from last May. Compared to April 2020 reports, gross production collections are down by $22.4 million, or 36.9%.

Motor vehicle taxes produced $61.1 million, down by $2.1 million, or 3.3%, from the same month of 2019.

Other collections composed of some 60 different sources including taxes on fuel, tobacco, medical marijuana, and alcoholic beverages, produced $110.4 million during the month. That is $32.4 million, or 22.7%, less than last May.

In Arkansas, revenues for May were just 3.2% below the same month last year but remained above forecast, according to John Shelnutt, head of economic forecasting for the state.

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Budgets Coronavirus Texas Oklahoma Arkansas State and local finance