State sales tax revenue dropped 21% in May, may take years to recover

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State sales tax revenue dropped an average of 21% in May, according to data released Tuesday, highlighting the severe impact of the COVID-19 pandemic on state and local economies.

May sales tax revenue dropped more than 30% in six states — California, Connecticut, Florida, Maryland, New York, and North Dakota— the report from the Urban Institute’s Tax Policy Center notes. This serves as supporting evidence of the suddenness of revenue shortfalls and the need for budget cuts, which are separately being discussed this week at the annual Brookings Municipal Finance Conference.

It could take years for state and local governments to fully recover, said participants at that conference, which is being held online this year because of the pandemic.

The University of Illinois-Chicago Government Finance Research Center estimates nearly one-third of municipalities drew down at least 10% of their reserves at the end of their 2020 fiscal year, Director Michael Pagano said.

Although all 42 states surveyed experienced a sales tax revenue decline, the impact was uneven. South Dakota, Utah, and Idaho experienced drops of 3% or less.

In the meantime, the pandemic’s most severe impact recently moved geographically from the Northeast and Washington state into the Sunbelt, while the number of cases in parts of California is flaring for a second time.

The unprecedented monthly decline in May sales tax collections reflected business activity in April when stay-at-home orders in many states put their economies on pause, according to Lucy Dadayan, a senior research associate for the State and Local Finance Initiative at the Urban Institute.

It wasn’t until March 19 that California became the first state with a statewide stay-at-home directive, so April was the first month to provide evidence of the pandemic's impact.

The National Governors Association and National Association of State Budget Officers have requested $500 billion in additional federal aid for states.

NASBO Executive Board Member Lauren Larson, who directs the Colorado Office of State Planning and Budgeting, said NASBO already projects the average state revenue decline to be more than the 11.6% that occurred during the Great Recession.

“The basic math here for the next at least three years” is that “we're going to be in a really difficult situation without additional federal aid,” Larson said.

States also need additional FMAP funding for Medicaid health services for the poor and education aid.

Larson said enhanced federal unemployment insurance benefits also should be renewed because they have boosted local economies.

The University of Illinois-Chicago Government Finance Research Center estimates nearly one-third of municipalities drew down at least 10% of their reserves at the end of their 2020 fiscal year, Director Michael Pagano said.

“Those are the ones that rely on the sales tax and the income tax as their primary general tax sources,” said Pagano, who predicted the communities that primarily rely on property taxes will experience a delayed revenue decline.

In the District of Columbia, second-half property taxes are due in September so the amount of delinquent payments is not yet known, said Fitzroy Lee, the District’s deputy chief financial officer and chief economist.

However, a shortfall is expected because the District of Columbia estimates its economy lost 93,000 jobs between January and July.

Responding to racial equality issues while also dealing with revenue shortfalls and expenses related to the COVID-19 pandemic have put state and municipal governments into a financial squeeze.

The city of Oakland, California, had to cut $122 million out of its $1.6 billion budget because of the pandemic, said Mayor Libby Schaaf at the Brookings conference.

The city of Oakland, California, had to cut $122 million out of its $1.6 billion budget because of the pandemic, said Mayor Libby Schaaf at the Brookings conference.

“We are holding our breath with the hope that this is the ‘V’ recovery, that we are going to recover relatively soon and relatively quickly,” Schaaf said. “Next year, we're going to have to make some much harder decisions if that, in fact, does not come to pass.”

More recently, the Oakland City Council has voted to cut $14.3 million from the 2021 police budget as a result of the Black Lives Matter protests, redirecting $2 million to create a non-police emergency response system.

Schaff predicted her city may link the emergency response system with community health clinics and other organizations that already have ties and trust in the community. “For example, Oakland has a large undocumented worker community,” Schaaf said. “Often these people are afraid to call the police.”

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State and local finance Coronavirus Sales tax Washington DC Brookings Institution Urban Institute
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