An Early Look at State Tax Collections Shows Dire Declines

An analysis by Fitch Ratings found that states’ April tax receipts fell sharply. A separate analysis from the National League of Cities says U.S. cities will lose $360 billion in revenue.Here’s the latest on shifting state tax guidelines, deadlines, and policy to deal with the coronavirus pandemic. For Wednesday’s coverage click here. Here’s a state-by-state roadmap.

What impact has the Covid-19 health crisis had on state tax collections?

The tea leaves are still hard to read, but an analysis published Wednesday by Fitch Ratings found April tax receipts in 24 states from the two largest sources—personal income taxes, and sales and use taxes—declined sharply. These one-month losses, coupled with anticipated losses in May and June, will likely leave many states with net revenue declines for fiscal year 2020, which ends on June 30 for most states.

“It’s hard to really come to any conclusions, but clearly the numbers for the most part are down,” Amy Laskey, Fitch’s managing director for U.S. public finance, said.

At the extremes, the credit ratings agency found that April year-over-year tax receipts dropped between 59% for Vermont and 19.2% for South Dakota. In between, large states such as Massachusetts, Pennsylvania and Illinois saw their collections drop 54.2%, 52% and 43.4% respectively.

On a fiscal year-to-date basis, the April losses suggest Vermont’s collections are down 6.3%, and year-to-date receipts are down 6% in Massachusetts, 5.2% in Pennsylvania and 4.3% in Illinois. South Dakota may finish the year ahead of the class as year-to-date collections are up 3.8%.

The numbers are particularly grim for personal income tax collections. In the 20 reporting states the median decline in April 2020, compared to April 2019, was 54.5%. Year-to-date receipts across the 20 states “were down a relatively modest 7.9% owing to good growth in the earlier months of the year,” Fitch said.

Laskey cautioned that the income tax numbers look better in some states from the perspective of dollars being withheld from employees’ paychecks. For instance, Connecticut reported a 62% drop in income tax collections for April, but a 6.5% jump in the withholding portion.

Sales and use taxes proved a more reliable source of revenue. The median April decline across the states was 9.3%, but fiscal year-to-date collections grew by 3.2%.

Fitch said the year-to-date numbers captured “strong consumer spending early in the year, including online sales tax growth.” The ratings company specifically pointed to the success of state laws enacted in response to the U.S. Supreme Court’s South Dakota v. Wayfair ruling. The 2018 ruling cleared the way for states to require remote sellers and online marketplaces to collect and remit taxes from e-commerce transactions.

Fitch cautioned that the data offers “only a glimpse of the potential impact of the pandemic” and pointed to factors that are obscuring revenue collection trends.

Personal income tax revenue April reflects “the extension of the tax return filing deadline to July 15 from April 15,” the ratings agency noted, while sales and use tax data tend to lag, “capturing activity early in most states’ stay-at-home orders.” The sales and use tax day, it added, “may also reflect elevated purchases as residents prepared for the ensuing shutdown and potential shortages of certain goods, although many essential items are nontaxable.”

Cities on Track for $360 Billion Revenue Loss

U.S. cities are projected to lose about $360 billion of revenue through 2022 because of the economic damage caused by the coronavirus pandemic, an unprecedented loss that would trigger deep spending and job cuts, according to a National League of Cities analysis released Thursday.

Pennsylvania’s municipalities will be hit the hardest, with the potential loss of about 40% of their revenue this year, followed by those in Kentucky, Hawaii, Michigan and Nevada, the advocacy group calculated. The projections are based on the expected rise in unemployment and assumes that every 1 percentage point increase in joblessness will cause tax revenues to fall about 3%.

The dire outlook adds to the growing warnings from state and local government officials about the financial impact of the pandemic-related shutdowns. Without aid from the federal government, cities will be forced to enact vast budget cuts that would exert a drag on the economic recovery. Read more here.