The pandemic has had a huge impact on the economy. The impact has been far and wide affecting individuals and businesses. State and local governments have also been severely impacted. The pandemic has created significant declines in sales and other taxes and fees because consumption of goods and services have fallen. People are staying home which means that revenues from taxes and fees have been significantly lower than in any period in recent times. As an example there has been an increase in purchases of food at the grocery store, which typically are not subject to sales tax, versus spending at restaurants which is typically taxed more heavily. Not only are the restaurants suffering but the lack of tax generated on these sales is having a large impact on governments. No spending means no sales tax revenue at the state and local level. Revenues are down at a time where governments have encountered large unbudgeted costs in response to the pandemic. Governments have had to spend money on developing public safety standards, maintenance and materials, and large amounts of personal protective equipment.
General sales tax makes up, on average, about one quarter of state and local tax revenue. Federal aid may help offset some revenue losses that state and local governments have experienced in 2020. As the pandemic continues into 2021, and the economy remains depressed, local governments will need additional aid to avoid cutting services and raising taxes. The reality of the situation is that there will most likely be a greater need for services. Governments will likely be forced to confront tough budget choices for many years as a result of COVID-19. Expect to see budget cuts in education, adult and elderly care, and mental health support, to name a few.
To try and avoid deeper cuts, many state and local officials are trying a variety of strategies to be able to continue to deliver services. They include closely monitoring budgets, reducing expenditures, borrowing money, using reserves and increasing tax rates or creating new taxes or fee structures. Many state and local governments will have to turn to the federal government for assistance if the economy does not recover quickly enough.
For more information on this, please consult your trusted TBC advisor.