Virus Surge Hits Budgets of States Most Vulnerable to Shutdowns

Florida and Texas are facing arguably the most pressure to scale back their economic openings thanks to recent surges in Covid-19 cases. They also stand out as the top two states with budgets most vulnerable to any shutdown.

Both states rely more than any others in percent of funding that comes from sales taxes, a source that’s been hit particularly hard by the closure of restaurants, stores, and theme parks.

As the two states have each surpassed nearly 600,000 confirmed cases combined, with daily new cases in the tens of thousands, governors in Florida and Texas are considering scaling back their economies amid enormous pressure. Their initial hesitancy to shut down may have fueled the recent surges according to some reports. Yet, experts say that approach has actually helped Florida and Texas—which rely on sales taxes for 63% and 60% of total collections respectively—generate much-needed revenue during a time when virtually every state budget is bleeding.

“States without income taxes like Florida are so dependent on tourism, as part of as part of their economy, I think that’s part of what drove policymakers to reopen these states early, said Meg Wiehe, deputy executive director at the Institute on Taxation and Economic Policy.

Recent virus spikes in Florida prompted Gov. Ron DeSantis (R), last month, to order indoor restaurants and bars to operate at half capacity, threatening action against businesses that don’t comply.

“If you go in and it’s just like mayhem, like Dance Party USA and it’s packed to the rafters, that’s just cut and dry. That’s not just an innocent mistake,” DeSantis said in a June 23 press conference. “There’s not going to be any tolerance for it.”

In Texas, closing down could soon become a “necessity” warned Gov. Greg Abbott (R).

Abbott, who ordered counties with more than 20 positive cases to require face masks in public spaces earlier this month, has expressed disappointment in local officials’ efforts to enforce the social distancing policy, suggesting harsher policy could be imminent.

“The only way those businesses are going to stay open is to make sure people wear masks to slow the spread of the coronavirus.” he said in a July 10 interview with CBS19. “If we do not all join together and unite in this one cause for a short period of time, of adopting a mask, what it will lead to the necessity of having to close Texas back down,” Abbott said.

Surges in the South

As case numbers surge in Texas, revenue collections continue to drop.

At the start of May, total monthly revenue collections fell a staggering 51% in the Lone Star state, although they jumped back up 9% in June, according to the state comptroller’s website.

On average, states rely sales taxes for about a third of their revenue, with the rest of their budget coming from a bulk of collections on income taxes and property taxes.

Comptroller Glenn Hegar attributed the modest uptick to looser restrictions on businesses throughout the rest of May, although relaxed social distancing measures and the revenue that resulted would likely be temporary if Abbott orders more scalebacks.

“While collections from restaurants also were depressed, the extent of the decline was checked by increased takeout and delivery sales,” Hegar said. “Retail sales likely also were boosted by increased alcoholic beverage sales at package, grocery and convenience stores. That’s because this category of spending shifted from restaurant and bar on-premise consumption, subject to mixed beverage taxes, to purchases for at-home consumption subject to sales tax.”

While staying open may have hurt efforts to stop the spread of Covid-19, it likely helped soften the blow on states’ budgets, according to Mandy Rafool, director of the fiscal affairs program at the National Conference of State Legislatures.

“If they had closed down, collections would probably be worse, " Rafool said.

Collections in Florida fell nearly $700 million in May, a 30% decline from estimates at the start of the year, according to the state’s Department of Revenue.

“The Florida government is going to have to worry about the budget impact on the new spikes,” said Jon Hamilton, an economics professor at the University of Florida. “Opening early led to initial increases in some states, but that seems be tapering off as people are worried about catching the virus.”

The department in its latest Monthly Revenue Report attributed the bulk of the decline to dry-ups in tourism and hospitality-related industries, which—through various sales taxes—the state has long depended on for funding. Last year, taxes on hotel beds alone generated over $1 billion in state revenue, according to Tax Policy Center data.

Curtailing normal retail continues to cause “a huge hit as those state tax revenues are tied to economic activity,” said Eric Kim, a director in Fitch Ratings’ U.S. public finance department.

Fear Factor

Several of Florida’s top resorts have since announced they’re welcoming guests back and ready to resume business—but experts say as the state continues to experience its delayed surge, people might be too afraid to spend like normal.

“Relaxing restrictions doesn’t mean business or revenue is going to magically reappear,” said Hamilton.

In March, DeSantis suspended vacation rentals temporarily, as many hotels and resorts closed on their own. The hospitality industry is expected to continue to suffer whether or not the governor pulls back again.

“There will still be less demand for going out because people are concerned regardless of whether the economy’s open or shut,” Rafool said. “Those who might normally be out shopping or eating will be staying home.”

Neither Florida nor Texas levies an income tax, which make both hot destinations for retirement, but like other non-income-tax states, it makes them vulnerable when the retail economy gets disrupted.

U.S. retail has bounced back and forth since the outset of the pandemic. Despite some modest increases, losses outweigh gains in recent months. May retail sales fell 6% short of what they were last year, despite recovering 17% after an unprecedented 14% April drop, according to data from Trading Economics—which monitors global economics.

The Bigger Picture

Analysts say while dependence on sales taxes is a theme among states that were quick to reopen, tax policy is just one of the brushes that paints a bigger picture.

“Unfortunately, reliance on sales tax revenues and the fear of economic damage caused by the lock down were not the only determining factors for the officials moving fast towards opening the economies,” said Lucy Dadayan, a senior research associate at the Tax Policy Center, which provided the sales tax dependency data. “Politics, sadly, played a role as well. And now we are witnessing the cost and damage of early openings in terms of skyrocketing daily caseloads in Georgia and elsewhere.”

Georgia was the first state to lift its stay-at-home order after just three weeks.

While just 25% of Georgia’s budget came from sales tax revenue last year, a report from researchers at Arizona State and Old Dominion universities forecasts the state’s revenue collections dropping nearly 36%, the sixth steepest fall in the country, as result of the pandemic.

The Peach State’s net revenue fell about 9% last month compared to last year’s June numbers, with sales tax collections staying relatively stable at less than a 1% drop, according to the Department of Revenue.

Other Sales Tax-Reliant States

Not all states with a high reliance on sales taxes have been hesitant to close down like Texas and Florida.

Washington, tied for the third-most sales tax reliant state with South Dakota—with 59% of revenue coming from the levy—kept its lockdown in place through the end of May.

The state’s rising caseload—over 42,000—on June 27 prompted Gov. Jay Inslee (D) to pause reopening. The Evergreen state was short almost 15% on revenue collections for the month of May compared to forecasts, according to its latest economic and revenue update.

South Dakota has experienced some of the lowest numbers in Covid-19 cases, though Gov. Kirsti Noem (R) never issued a stay-at-home order.

It’s one of just three states that didn’t experience revenue collection declines in April.

South Dakota is one of the least densely populated states, but its also an outlier when it comes to applying sales taxes to economic activity, as it taxes 62% of consumables, by far the most of any state, according to Ulrik Boesen, a senior policy analyst at the Tax Foundation. Hesaid that’s especially important when most folks are limiting purchases to essentials.

While localities across the country may impose smaller levies, South Dakota, Alabama, and Mississippi are the only states that include groceries as part of their broader state sales tax base, according to the Center on Budget and Policy Priorities.

In Nevada—the fifth most sales tax reliant state—total sales tax collections in were down almost 30% in April, compared to April 2019, according to the state’s Department of Revenue. In total, the general fund fell short nearly the same amount.

Gov. Steve Sisolak (D) gradually started reopening in May, allowing casinos—some of the state’s biggest revenue drivers—to resume some operations in June. He’s since halted the next reopening phase after recent spikes in cases, and casinos could be in for a tougher road ahead.

Earlier this month a state agency reported half of Nevada businesses weren’t enforcing mandated social distancing measures. That prompted a Sisolak tweet that warned of “swift and decisive actions” if “concerning reports on non compliance continue”.

As for Florida and Texas the virus surge has shown little sign of waning soon, and eased restrictions on businesses project to further mushroom the spread.

Factoring in “eased mandates” both states could see new daily cases rise by more than 400 by August, with Texas showing potential to see increases closer to a thousand, according to projections from the Institute for Health Metrics and Evaluation.