State tax revenue declined in March

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Most states waited to issue stay-at-home orders until the last five days of March or the beginning of April, said Lucy Dadayan, a senior research associate for the State and Local Finance Initiative at the Urban Institute.

Tax revenue collected by the states declined 1.3% last month compared to a year earlier as the first effects of the COVID-19 pandemic began rippling through the economy, according to preliminary data from 45 states collected by the State and Local Finance Initiative at the Urban Institute.

When April data becomes available in about a month, it is expected to begin showing the full force of the shutdown of nationwide economic activity.

Although data from Hawaii, Michigan, Nevada, New Mexico and Wyoming were not included in the report, Wyoming is expected to show a significant decline because it relies heavily on taxes from the oil and gas industry. Oil prices have plummeted.

It wasn’t until March 19 that California became the first state with a statewide stay-at-home directive issued by Gov. Gavin Newsome. The California executive order gave exceptions only for essential activities.

Most states waited to follow suit until the last five days of March or the beginning of April, said Lucy Dadayan, a senior research associate for the State and Local Finance Initiative at the Urban Institute.

The April collection data will be particularly problematic because the Internal Revenue Service and all states have delayed income tax deadlines from April 15 to July 15. As a result, states will collect substantially less income tax revenues this month.

Dadayan said April is the most important month for income tax payments.

In addition, state sales tax revenue has a one month reporting lag because retailers don’t transmit their collections to state governments immediately. As a result, the true level of decline in sales tax revenues resulting from the stay-at-home orders won’t be known until June when the May receipts are released.

March sales tax revenue actually rose by 2.1% as a reflection of February collections at the retail level.

But personal income tax revenue declined 4.8% and corporate income tax collections declined 0.2%, with most of that drop centered in California and Oregon.

Many states saw healthy growth in tax revenue collections between July of last year and last month with the average increase at 5.7%. Those months represent the first nine months of the 2020 fiscal year for 46 states.

However, two states -- Alaska and New Hampshire-- already have reported declining revenue through the end of March.

The gains in other states are expected to be erased in the last three months of their state fiscal year because of the COVID-19 pandemic. And their state constitutions prohibit them from running a deficit.

Maryland estimates its lost tax revenue at $2.8 billion over the four months from March through June, according to the Washington Post. The newspaper said Virginia has already suspended plans to increase spending on K-12 education by $540 million over two years, higher education by $356 million and Medicaid by $207 million.

Maryland Gov. Larry Hogan, who chairs the National Governors Association, said Sunday on CBS’s Face the Nation that “there’s tremendous bipartisan support” for NGA’s request for $500 billion in federal aid to the states.

“Nearly every governor in America supports it, both Republicans and Democrats,” said Hogan, a Republican.

Senate Republican Majority Leader Mitch McConnell said in a radio interview last week that states might opt to file for bankruptcy, which is an alternative that would require changes to the federal bankruptcy code.

Hogan described McConnell as “still somewhat reluctant” to support the federal aid, but cited the bipartisan bill in the Senate authored by Sens. Robert Menendez, D-N.J., and Bill Cassidy, R-La., that would provide the $500 billion.

“We've had numerous conversations, I have personally, with the president and vice president, with [Treasury] Secretary Mnuchin, with ...Sen. McConnell, with leaders on both sides of the aisle in the Senate and the House,” Hogan said. “I think we're making real progress.”

Speaker Nancy Pelosi, D-Calif., promised Sunday on MSNBC that state and local aid in the next round of emergency legislation will be agreed to “in a significant way.”

“They have made outlays for the coronavirus that are extraordinary,” Pelosi said. “And they have lost revenue, and we want that covered -- because of the coronavirus, and want that covered too.”

New Jersey Gov. Phil Murphy said on NBC’s Meet the Press that McConnell’s suggestion that states could file for bankruptcy “was both irresponsible and not factual.”

“We won't go bankrupt, but we'll gut the living daylights out of things like educators, first responders, the very folks we desperately need,” Murphy said. “This is the health care crisis of all time in our country's history. We need states to be fully funded at the point of attack, being there for our residents.”

Murphy described the Menendez-Cassidy bill as “exactly what the doctor ordered.”

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