Coronavirus, Health Policy

Coronavirus slams state taxes

‘We Have No Money’: Coronavirus Slams State Taxes

By: Sophie Quinton, Stateline

Twenty-three states have passed budgets for fiscal 2021, which for most states starts July 1, according to the National Conference of State Legislatures, a Denver-based organization that represents legislatures. Twenty-seven states are still debating their budgets for next year.

Lawmakers in states with a budget in place may have to make changes, given the sputtering global economy. “We are going to have to review our budget, there’s no question about it,” said Washington state Sen. Christine Rolfes, a Democrat and chairwoman of the Senate Ways and Means Committee. 

Rolfes said lawmakers adjourned on March 12 thinking they’d crafted a prudent budget, with a huge ending balance and a $1.8 billion rainy-day fund. But they didn’t anticipate the scale of the economic slowdown.

Cities also are bracing for a drop in tax collections. “We’re looking at at least a $100 million deficit,” said Las Vegas City Manager Scott Adams. The total budget is about $650 million, he said. “And that’s a midpoint, that’s not the worst-case scenario. And I’m worried that we might be leaning closer to the worst-case scenario.”

Major sources of sales tax revenue, such as restaurants, are closed or doing a fraction of their normal business through curbside pickup and delivery, Adams said. 

He said the city has furloughed about 200 employees so far due to the pandemic. If the city doesn’t get federal funding to help it absorb the costs of fighting the coronavirus, he said, those furloughs will become unpaid. 

Comparisons to the Great Recession underscore how damaging the pandemic could be for states. Sharp declines in tax collections during the 2007-2009 recession and subsequent slow recovery led lawmakers nationwide to lay off state workers and cut spending on education, health care and social services.

Ten years later, spending on some programs still hadn’t recovered, according to research from the Pew Charitable Trusts (Pew also funds Stateline).

Unlike the federal government, almost all states are required to balance their budgets.

It’s not clear that comparisons to the Great Recession can help states and cities weather the current crisis, fiscal experts say, as the nature of the pandemic is so different — it’s not a slowdown caused by a financial crisis, or a housing bust — and its duration is so uncertain.

“We’ve never had a recession before where businesses are under order to close their doors,” said Jared Walczak, director of state tax policy for the right-leaning Tax Foundation, a Washington, D.C.-based tax policy nonprofit.

In a typical recession, sales tax collections fare better than income tax collections because laid-off workers still make basic purchases, Walczak said. But if businesses stay closed for months and consumption patterns change, sales taxes could emerge as a bigger pain point.

“The one class of purchases that’s doing extremely well right now is groceries, and everything else is falling off the cliff,” he said. Most states don’t tax grocery sales, he noted.

Some states have built up substantial rainy-day funds and budget reserves over the past decade which can help them absorb a short-term drop in revenues and address the pandemic. Governors such as Newsom and Washington’s Jay Inslee, a Democrat, already have drawn upon their state budget reserves.

But even large reserves may not be big enough as lawmakers scramble to fight the pandemic. California budget analysts, for instance, began the year projecting a $21 billion cash reserve by this summer. They’re now warning the money could be spent in months.

“I think to some extent states did learn from the last crisis — they built up their rainy-day funds to the highest nominal level on record,” said Tracy Gordon, a senior fellow at the Urban Institute, a Washington, D.C.-based research organization. “It’s just that nothing could prepare them for this.”

Tim Henderson contributed reporting. 

Stateline, an initiative of The Pew Charitable Trusts.