The COVID-19 Pandemic Has Not Crushed State and Local Government Tax Revenues

The Census Bureau finds state and local governments collected $1.12 trillion in tax revenue during the first nine months of 2020, just $8 billion less than the same period in 2019.

By Marc Joffe of Reason.

"The Census Bureau just reported that state and local governments collected $1.12 trillion in tax revenue during the first nine months of the 2020 calendar year, which is just $8 billion less than they collected during the same period in 2019. It’s clear that the worst-case forecasts estimating how badly the coronavirus pandemic would hit state coffers have thankfully not come to pass.

The new Census Bureau data also raises questions about the need for the proposed $160 billion state and local aid package that the Trump administration and members of Congress have been debating in recent weeks.

Census data are provided on a lagged basis, so it will be a few months until we know how state and local revenues held up during the fourth quarter of 2020. But some entities, including the state of California, publish monthly updates. In the 2020 calendar-year-to-date, California’s general fund revenues are running $2.1 billion (1.6 percent) above the 2019 levels.

The accompanying chart shows California’s general fund revenue collections for the first 11 months of 2020 versus the same period in 2019.

The full calendar year totals include the economically strong pre-COVID-19 pandemic months of January and February. If we just look at the March through November period, revenues were down $2.2 billion (2.1 percent).

While this is admittedly a significant revenue hit, state revenue declines of this magnitude have not historically elicited state bailouts or federal stimulus packages.

For the fiscal year to date, California’s revenue collections are running $12.4 billion above the state’s dismal projection issued back in May, when state officials feared the coronavirus pandemic and economic shutdowns would crush its economy. California’s revenue has exceeded its forecasts for each of the five months of the fiscal year 2020-2021, which started on July 1, 2020.

Of course, there is no guarantee that state revenues will continue to outperform expectations going forward. Another recent surge in COVID-19 cases and stricter public heath orders could impact sales tax revenues and employment. But since unemployment has been concentrated among lower-income workers during the pandemic, its effect on income tax revenues has been relatively small given the state’s progressive tax rates. Further, these revenue losses could be offset by unanticipated capital gains tax revenue arising from strong tech company performances and the successful initial public offerings this month by Airbnb, DoorDash, and other California-based startups.

While the state of California and many other government entities are seeing 2020 revenues running close to or prior calendar year levels, a few governments including those heavily dependent on travel and tourism are suffering steep revenue declines.

For example, Anaheim, California, has suffered an 89 percent reduction in its transient occupancy tax revenue compared to the same period last year due to the pandemic and state government-mandated closure of Disneyland.

Similarly, public transit systems across the state have also suffered sharp reductions in farebox revenue, but, because mass transit operations are generally operated by special purpose governments like the Bay Area Rapid Transit District (BART), they fall outside the universe of governments eligible for the recently proposed $160 billion federal aid package.

Because state and local governments lack the federal government’s ability to offset deficits with newly created money, their best practice is to build up liquid reserves to cushion them against contingencies. Prior to the COVID-19 recession, many state and local governments had built up considerable reserves. According to the National Association of State Budget Officers (NASBO), the 50 states had accumulated a combined $113.2 billion in rainy day funds and general fund reserves at the end of their 2019 fiscal years. A Reason Foundation review of 9,000 general-purpose local government financial statements found an additional $94 billion of unrestricted general fund balances. Taken as a whole, then, the state and local government sector entered the crisis with a $200 billion cash cushion—significantly more than the current 2020 revenue decline reported by the Census Bureau.

Contrary to some of the dire economic forecasts made early on during this coronavirus pandemic, state and local revenue losses thus far have been limited. Likewise, last month President-Elect Joe Biden expressed fears that local governments might have to lay off first responders due to budget shortfalls, but it is clear state and local governments have experienced smaller tax revenue losses than projected.

While the longer-term fiscal impacts of COVID-19 and this recession are unknown, a small number of governments have taken very significant revenue hits, and costs for things like unemployment insurance are certainly higher than expected this year, most state and local agencies should be able to offset their relatively minor tax revenue losses by drawing down reserves and selectively trimming costs."