This week, several cities and counties across the country have begun to publish revised budgets in light of the Covid-19 closures that have affected virtually every aspect of civic life. With hotels, restaurants, tourism, entertainment, and non-urgent medical care suspended, local governments are facing dramatic shortfalls in revenue.
The scope of the revenue shortfalls will vary according to local economic strength, however, virtually all local governments will see suppressed sales tax revenue roughly in ratio to the extent of business closures in the jurisdiction. While these figures are still being tallied for the month of April as of this writing, early estimates indicate economic activity has declined as much as 20%, despite enormous market transactions by the Federal Reserve, an increase in unemployment benefits, federally-back business loans, and other CARES Act programs. Even after some businesses reopen, consumers may not be able or willing to return to their pre-Coronavirus spending habits, and this may lead to a prolonged period of lower traffic at restaurants, bars, hotels, and other local businesses which tend to contribute robust sales tax revenue in a healthy economy.
Those local governments primarily financed through property taxes will face cash flow concerns if property transactions decline or there is a recession-induced decline in property values. Commercial properties, too, will likely see declining values as conventional retail suffers through a combination of Coronavirus closures, retail bankruptcies, and a corporate debt market which may not be able to extend additional credit in the near term. These factors will come together to cause a general decline in property tax revenue, and while not as immediate as the decline in sales tax revenue, no less vital as property taxes typically represent the lion’s share of local government budgets.
Finally, income taxes, while only assessed by a few local governments nationwide, will also generally see dramatic declines as unemployment continues to rise. New York, most notably, may be hit especially hard by a decline in income tax revenue as many professional services will see reduced revenue for a prolonged period. If the early April projections are indeed correct, then a 20% reduction could be calamitous for many local budgets. In the next part of this series, I will outline how local governments may prepare for fluctuations in revenue that are likely to arise as businesses gradually reopen under a new paradigm of social distancing.