State tax revenues fell almost 50% in April

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The Urban Institute's Lucy Dadayan described the sales tax decline as alarming and a preview of what is expected to be a more dramatic drop when the May data becomes available.

Tax revenues declined in 46 states by an average of 49.4% in April compared to the same month in 2019, according to preliminary data collected by the Urban Institute’s State and Local Finance Initiative.

The monthly drop collectively topped $60 billion.

The only states not reporting were Hawaii, Nevada, New Mexico, and Wyoming.

Much of the one month decline can be attributed to the delay in the filing deadline for personal income and corporate income taxes to July 15 instead of April 15, which presumably will be partly offset in midsummer.

About 13% to 15% of personal income taxes are normally collected in April, but all states reported steep declines in estimated and final payments. Withholding growth remained positive in one-third of the states for April, but on average it was 0.2% lower than April 2019.

“States are hopeful that they will receive most of the delayed payments in July,” Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, wrote in a recent blog post.

“However, some of the deferred taxes may not be collected in July as taxpayers’ financial outlooks worsen,” Sigritz wrote. “Most states also noted a decline in the withholding category of personal income taxes (or the amount withheld from an employee’s paycheck and paid directly to the government) in April.”

Sigritz said the declines “were perhaps not as much as many had expected” because many states impose taxes on unemployment benefits.

However, year-over-year sales tax revenue dropped $3.8 billion, reflecting collections at the retail level a month earlier when stay-at-home orders started.

California became the first state to issue a stay-at-home order that was effective March 19. Most states waited to follow suit until the last five days of March or the beginning of April.

Lucy Dadayan, a senior research associate for the State and Local Finance Initiative at the Urban Institute, described the sales tax decline as alarming and a preview of what is expected to be a more dramatic drop when the May data becomes available.

NASBO also expects a steeper decline in May sales tax revenue.

Also looking to the future, income tax collections are expected to dramatically fall next year because 40 million Americans have filed jobless claims in the last 10 weeks.

Personal income taxes and sales taxes combined represent 75% of all state general fund revenue collections, according to NASBO.

“In many ways, it is expected that the worst is yet to come for tax revenues as states begin to feel the full economic effects of the COVID-19 pandemic,” Sigritz wrote. “In the coming months, nearly all sources of state tax revenue will be impacted.”

In addition to the declines in sales tax revenue and personal income taxes, states are expected to experience shortfalls in corporate income taxes as corporate profits decline, a drop in gaming revenue with less casino activity, and a falloff in motor fuel taxes from limited driving.

Dadayan estimates the states will end their fiscal years with about a $75 billion collective shortfall in their budgets and the revenue dropoff will create a $125 billion gap for the 2021 fiscal year.

The liberal-leaning Center on Budget and Policy Priorities has a much higher estimate of $650 billion in state budget shortfalls over the next two years.

The National Governors Association has requested an additional $500 billion on top of the $150 billion Congress approved for states and local governments in the CARES Act.

The HEROES Act approved by the House has a total of $915 billion for state and local governments, but the Senate has balked at even considering that legislation.

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