The economic impact of shutting down our nation to halt the spread of COVID-19 is clear from the going-out-of-business signs and the 3.3 million jobless claims filed last week by laid off workers.
States now face devastating hits to their budgets from lost tax revenues: income, business, sales, tourism, meals, and more.
Lost revenue means state budgets may be blown up forcing states to institute cuts to programs and spending or layoffs to keep budgets balanced as mandated by law.
Cities and municipalities also face challenging budget times ahead too especially those dependent on sales tax revenue.
Governors are clamoring for federal aid to keep them afloat until coronavirus closures can be lifted. So far, Washington has responded.
As The Hill reports, the aid packaged signed into law last week included $1 billion for state governments, President Trump’s emergency declaration frees up $50 billion in emergency funding and the stimulus package passed by the Senate would include another $150 billion for state and local governments and $8 billion for local governments specifically.
State and local lawmakers say it’s just not enough.
Some states are better positioned for this disaster than others because they have healthy reserves and rainy-day funds built over the past decade’s tremendous economic expansion. Florida, California, Arizona, Georgia, Maine, Maryland, Nebraska, Idaho, Pennsylvania, and Washington have approved or are close to approving measures to tap into rainy day funds.
Others were barely treading water before the coronavirus touched down in the U.S. and now have no other options.
Revenue sources will play a big role in how states weather this storm.
According to the Tax Foundation, over a dozen states depend on sales taxes for most of their revenue. For Louisiana and Nevada it comprises 40 percent or more of their revenue base. If residents and visitors can’t spend because stores, casinos, and restaurants are closed, sales taxes will take a massive hit.
Meanwhile individual income taxes comprise a third or more of revenue in almost a third of states including California, Maryland, Virginia, and Oregon. Unemployed workers can’t pay income taxes which will hurt most states.
Property taxes are the most popular source of revenue for nearly all states which may be a stable source of revenue provided a protracted national shutdown doesn’t trigger mass foreclosures.
Here are 3 forces affecting states budgets:
- Tourism – Florida, the Sunshine State, is the fourth biggest tourism-dependent economy in the country with theme parks and beaches. Luckily, the state has $3.9 billion in cash reserves and just added another $300 million to prepare for the coronavirus response. However, with the closures of Walt Disney Co. and NBCUniversal closed theme parks in Orlando and the closures of beaches in Fort Lauderdale and Miami, the state faces a significant loss unless tourism picks back up when they are able to reopen. About 10 percent ($3 billion of the state’s forecasted $36.5 billion in general revenue) was expected to come from tourism sales tax revenue.
- Stock Market – California has a substantial $20 billion cash reserve fund with $18 billion in its rainy day fund that will provide it a good cushion against the volatility of the stock market. California is the fifth largest economy in the world, but is heavily dependent on tax revenue from wealthy earners and capital gains (a tax on the profit realized on the sale of stocks, bonds, precious metals, real estate, and property). Reportedly, about 70 percent of the state’s general fund revenues come from income taxes and the top 1 percent of taxpayers (those making more than $500,000 annually) paid 47 percent of total personal income tax in 2017. Capital gains taxes is a big contributor. New York is also dependent on capital gains tax revenue.
- Layoffs – Mass layoffs drain state coffers of needed revenue as workers can no longer pay income taxes. Thirty-one states rely on income taxes as their greatest sources of revenue.
We recognize that combatting the spread of coronavirus is critical to save lives and ensure that our citizenry stays healthy.
However, our national and state leaders are beginning to discuss balancing the costs of keeping mandatory closures and stay-at-home directives in place against the benefits. It’s certainly a big tradeoff that has triggered the loss of millions of jobs in a matter of a week or two.
Emergency relief packages of federal funding to keep families, small businesses, and states afloat are and should be temporary.
It is time to think about how and when we can safely and responsibly start reopening our nation for the sake of workers, families, and states.