Analyzing the Impact: Sales Tax & Local Government

by Shylo Bisnett, on October 22, 2020 at 7:15 AM

With the economy reacting to COVID and no new relief package on the horizon, uncertainty grips municipal leaders

In a recently released report, the Brookings Institution takes an updated look at how COVID-19 is impacting state and local tax revenues today—and what the picture might look like over the next few years.

We’re seeing so many stories from around the nation about precipitous drops in local and state tax revenues from changes in consumer-spending patterns. While contractions in personal spending tend to occur during an economic recession, the pandemic has been slightly different. On one hand, we spent big on lower-taxed items such as groceries instead of higher-taxed dining and bar visits or vacations. But we also spent much less on services, which rarely incur sales tax. And while job losses have been significant, they have largely been concentrated among lower earners, which means less impact on income-tax revenue. This uneven application of tax hits and job losses has somewhat insulated the economy—so far.

We project that state and local government revenues will decline $155 billion in 2020, $167 billion in 2021, and $145 billion in 2022—about 5.5 percent, 5.7 percent, and 4.7 percent, respectively—excluding the declines in fees to hospitals and higher education."
Brookings Institution
September 24, 2020

But while local and state governments are definitely feeling the pinch of lower sales-tax receipts, government spending through the CARES act and Coronavirus Response Fund made the losses much less painful. By pumping nearly $200 billion into local and state coffers, federal support has mostly offset the impact of COVID’s devastating economic losses in 2020. However, with no additional funding on the horizon, local leaders are starting to worry.

Local leaders discuss funding

New York’s Comptroller Tom DiNapoli remarks that, “our local governments don’t have the means to [rebuild] themselves. Direct aid from the federal government is needed to help our communities recover.” This is particularly true for communities in more populous states since federal support has not been equitably applied, points out Brookings. Where New York experienced a serious COVID crisis and ensuing losses, it only received federal funding equating in 6% of own-source revenue; however, in nearby Vermont? That figure is 23%. Harder-hit communities, like DiNapoli warns, are likely to continue experiencing economic aftershocks through increased expenses to support a corona-centric future.

We continue to hope for an additional influx of federal funds to support state and local governments. As these levels of government can’t engage in the kind of debt-spending the federal government can, local leaders would be forced to make significant cuts to critical services at a time when residents can least tolerate them.

In advance of any cuts, it’s smart for municipalities to start making targeted reductions in spending, as well as fund investments with proven ROI, such as online revenue-management and reporting tools like Localgov, that helps to cut costs without cutting services. Our team continues to watch trends in state and local spending and work closely with current and future clients to identify ways Localgov and Azavar can help eke out savings. We understand what every dollar means to a community, particularly now.

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Topics:Sales Taxdisaster relief funds