COVID-19 pandemic seems to play havoc with the economy and taxes. The impact has been huge on state and local tax revenues. The level of impact is no less severe than any other recession. If you go by statistics, you will find that the pandemic has adversely impacted the economy, shrinking state sales tax revenue by about $6 billion. This amounts to 21 percent compared to the revenue during the same period last year. A lockdown situation, with closed businesses, rising coronavirus causalities, and extension of sales tax filing and payment deadlines have all contributed to this quagmire.
The Real Impact on State Tax Revenue
Total state tax revenue shot to the highest level since the 2007-09 recession during the final quarter of 2019. Thanks to the tax collection growth during this period post-recession that each state was able to allocate its funds for the economic shocks inflicted by the pandemic.
As more people are forced to stay home, sales tax revenues have come down drastically due to a lowered consumption rate. That means a drop in taxes and fees imposed on airports, hotels, and highway tolls. Therefore, tax revenue has dropped drastically due to a lowering of fees imposed on the travel and tourism industry. There has been a drastic reduction in the revenue generated from taxes. Further, other sources of state revenue, such as vehicle registration fees, transportation funds, and gas taxes, are declining.
Similar to economic recessions, the pandemic has adversely affected state and local revenues. However, the decline in income tax revenue has not been drastic. The reason is that employment losses are primarily concentrated on low-wage workers, who contribute less to the income tax coffer.
Blame the coronavirus pandemic for triggering a severe state budget crisis. State revenues are falling rapidly while there has been a spike in the costs of commodities as there is no production and many businesses are shut down. Add to this, the rising unemployment rate and the economy is declining rapidly as a result of the COVID-19 pandemic.
Substantial State Tax Revenue Shortfalls for 2020, 2021
The rapidly declining state revenue projections are a reminder of the times we are all set for in the near future due to the pandemic-induced downturn.
States grapple with the financial crisis and are working hard to balance overstressed budgets. The crisis is agitated due to no to low productivity, rising need for healthcare services, and allocation of separate funds to fight against the pandemic.
State and local income tax revenues are expected to drop to 7.5 percent or $37 billion in 2021 as the pandemic has taken a toll on revenues.
When the pandemic struck, states began to balance their budgets by making cuts and tapping reserves. While COVID-19 continues to wreak havoc with life, the stock market has remained unaffected thus far and the job loss among high-wage earners has not been much. This has ensured that revenues have not dropped by as much as were anticipated in some states. But that does not mean there have not been revenue shortfalls for states. With the federal aid for businesses ending, the crisis might deepen further.
States Imposing Cuts; Need Federal Help
State estimates project a drastic drop in revenues for the present fiscal year beginning July 1.
To make matters worse for states with oil-related industries, the coronavirus recession has brought along a decline in economic activity. As a result, tax collections have suffered due to plunging oil prices.
It remains to be seen as to how long states can survive on their budget reserves, including rainy day funds. Sadly, things might become worse financially for state tax revenue if more employees are laid off, public services are cut, and government contracts for businesses are canceled. States might be forced to impose damaging cuts. Georgia, Maryland, and Florida have already started with the cuts on schools, colleges, and behavioral health.
Now states look up to federal policymakers to provide assistance to deal with the ongoing COVID-19 pandemic.
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