States facing deep deficits

Drop in tax revenue could mean budget cuts

States are starting to report their tax collections for March and April, and Sen. Mitt Romney, R-Utah, was right when he said, “Blue states aren’t the only ones who are screwed.”

Georgia is showing a decline of more than $100 million in sales tax, fuel tax and other tax revenue compared with the same period a year ago. Tennessee’s tax revenue is down more than $120 million. Pennsylvania’s is off by more $760 million, and Texas, which also has been hammered by the collapse in oil prices, has seen tax collections plummet by nearly $1 billion.

The total declines compared with last year would be even larger if personal and corporate income tax collections were included. But much of the drop in those categories was the result of postponement of income tax filing dates until July 15.

Georgia, Tennessee, Pennsylvania and Texas are among the first states whose coronavirus-impacted tax revenue numbers have been reported. But no state is expected to show yearover-year increases in tax collections in the face of a pandemic that shut down businesses coast to coast and led to unemployment rates not seen since the Great Depression.

“The numbers are going to be bleak everywhere. The only question is how bleak,” said Jack Pitney, a political science professor at Claremont McKenna College who specializes in studying the Republican Party. “Here in California, our tax revenues are heavily dependent on the top 1%, and the stock market hasn’t dropped as much as people feared. But we’re still talking about the biggest state deficit in history.”

House Speaker Nancy Pelosi has been pushing for stimulus money to help states and cities address the expected declines for more than a month now. Packages of anywhere from $500 billion to $1 trillion have

been bandied about, with Democrats predicting massive cuts to payroll and services if the emergency money is not forthcoming.

Republicans led by Senate Majority Leader Mitch McConnell have tried to temper expectations for massive bailouts by arguing that states shouldn’t use the money to cover poorly run pension plans, suggesting that filing for bankruptcy might be a better way for them to deal with unmet obligations.

On Tuesday, Pelosi unveiled the HEROES Act, a $915 billion proposal to help financially strapped states, territories, tribal authorities and local governments. Sen. Jeff Merkley, D-Ore., who sits on the Senate Appropriations Committee, said the bill “helps fill the massive crater in revenue that this pandemic has created for state and local governments. Without this assistance, millions more could lose their jobs, and health care, education, and housing services will be cut across the nation.”

Some Republicans again raised the idea that blue states intended to use the money to pay off their old pension problems. One congressman from Pennsylvania tweeted that the bill was “an 1,800+ page liberal wish list.”

“Speaker Pelosi’s bill is a recipe for prolonged recession, with virtually nothing to get the jobless back to work,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee.

But as more states get a handle on March and April tax collections and the size of the declines start hitting home, even some die-hard Republicans are beginning to change their tune.

In Georgia, for example, the chairs of both the House and Senate appropriations committees have asked the federal government to approve $500 billion in state shortfall aid, according to a letter they sent to members of the state’s congressional delegation on May 4.

“We are formally requesting your support for the timely approval and disbursement of these funds to close the unprecedented gap in dollars required to maintain a conservative and lean government framework of services for the state of Georgia and our constituents,” Rep. Terry England, R-Auburn, and Sen. Blake Tillery, R-Vidalia, wrote.

Danny Kanso, a policy analyst for the Atlanta-based Georgia Budget and Policy Institute, noted that Georgia’s unemployment rate is rising rapidly, and with more people out of work, income tax revenue is bound to suffer.

“We’re in a really precarious position here,” Kanso said. “It’s hard to write a state budget when you expect such a sharp drop in revenues. Federal stimulus is the only hope to avoid negative policy actions like deep spending cuts.”

Though a $107 million decline in sales tax revenue is “a fairly large chunk of money,” Kanso said it represents only a couple of weeks of coronavirus-affected sales in March. When the state publishes its next set of numbers in a month, they will be much worse – so bad that unless Georgia gets some federal assistance, it will have to cut its budget by as much as 14%.

“Spending cuts of this scale would mean laying off teachers and furloughing staffers,” he said. “That worsens our jobless numbers at a time of historic unemployment and really should be the last thing that we want.”

Oil price shock hits Texas

Falling oil prices have exacerbated the crisis in Texas, making the carnage in March especially severe. Crude oil prices traded at more than $60 a barrel in December but plunged to $44 in February and down again to $20 a month later as major oil producers Russia and Saudi Arabia failed to cut back supply in the face of shriveling worldwide demand.

“The oil and gas sector is estimated to lose 200,000 jobs in Texas this year and 50% to 60% of fracking companies are going to go out of business,” said Austin economist Angelos Angelou. “On top of that, there will be huge pressure on the banking sector that loaned these businesses money.”

Like Georgia, the date on Texas tax revenue collections may say April, but they reflect activity that took place a month earlier in March.

The slump in the oil patch dominates those numbers, according to Robert W. Gilmer, director of the Bauer Institute for Regional Forecasting at the University of Houston. The more than $200 million drop in tax collections on oil and natural gas production compared with the same month last year is a result of that downturn, but so is most of the $264 million drop in the sales tax.

That’s because sales taxes in Texas are tied to cycles in the oil and gas markets.

“When times are good and capital spending is high, when the rig count is up, the state collects more sales taxes,” Gillmer said.

So the slump in the oil and gas business explains most of the drop in March sales taxes, Gillmer said, but not all of it. The number also captures the last two weeks of the month when stay-at-home orders affected retail and restaurant sales. He added that the coronavirus also contributed to a $40 million dip in hotel occupancy taxes.

But that’s nothing compared to what will be reflected in the April numbers when they come out in a month’s time, said Angelou, the Austin economist. And it’s not as if sales and tax revenue will automatically snap back as lockdowns are eased.

“It’s going to take a significant change in consumer confidence before we go back to spend on restaurants and shop,” Angelou said. “All indications are that the economy will continue to decline up until the end of May or early June. The state government is going to have serious funding problems this year and next, and they will have to cut down on services or furlough some people.”

‘The worst possible month’

Unlike Georgia and Texas, economists say tax revenue for Pennsylvania represent what really happened in April – not the month before – and the numbers look bad.

“This was the worst possible month for taxes in almost every category,” said Joel Naroff, president and founder of Naroff Economic Advisors in Bucks County. “This is when businesses shut down. People weren’t driving. They couldn’t go to a showroom to buy a car. Unless their stove actually broke, they were not going to visit a Best Buy for any appliances.”

Sales taxes were down nearly $340 million compared with April 2019. Other revenue, which include taxes on cigarettes, liquor and gambling, was down $160 million, and motor vehicle taxes were down nearly $150 million.

Some purchases were merely postponed, Naroff said. So the magnitude of the decline in sales tax revenue was overstated. But some of the sales will never come back, Naroff said.

“It’s not like people are going to go out and eat twice as many meals,” Naroff said. But while the economy will snap back, Naroff said, it will take years before it will be as strong as it was before the pandemic hit.

“We’ll be lucky if in three years we’re back down to a 5% unemployment rate nationally,” Naroff said.

That also means personal and corporate income taxes are going to trend lower, putting pressure on state and municipal budgets.

“That’s why they need a bailout as much or more than businesses,” Naroff said. “Keep in mind that businesses weren’t fighting the virus. States and local governments were fighting the virus. That’s why they need relief. The idea that they should go bankrupt is crazy.”

In search of ‘good news’

Tennessee has just published its most recent tax revenue, too, and although the numbers are labeled April, they also represent March collections.

The nearly $50 million drop in sales tax revenue compared with the same month a year earlier shows that the pandemic was already starting to take hold, according to Lola Potter, communications specialist with the Tennessee Department of Finance and Administration. But like Georgia and Texas, the worst shortfalls are yet to come.

University of Tennessee economist Matthew Murray said the sales tax and the privilege tax are the best gauges for the impact that coronavirus has had on the state economy so far. He said the 25% drop in privilege taxes, which includes realty transfer taxes, is significant because it shows that home buyers went into hibernation as soon as people began to worry about coronavirus.

“The good news, if there is good news,” Murray continued, “is that the economy will start to improve as we open up. As long as we don’t get a second wave, we are likely to see further improvement as we move into 2021.”

With regard to bailouts, he said the precarious state of government finances prove that some relief is needed. But Murray wasn’t willing to say how much the federal government should set aside in the next stimulus bill.

“If people on the left and the right both hate what’s proposed,” Murray said, “it will probably be a pretty good bill.”