Local Government
How COVID Shutdown the U.S. Economy and Left Local Governments Without a Sales Tax Base
When the reality of COVID-19 began to set in, I first thought of my going door to door with my father — a school superintendent in Portsmouth, Ohio— to help raise money to repair a dilapidated high school first built in 1912. I knew COVID-19 was going to sap local tax revenue local officials like my dad have relied upon for long to provide for needed public services.
New research I’ve done with my colleague suggests my fears were not an exaggeration: huge numbers of counties in North Carolina and Florida are close to financial distress.
As COVID-19 positive cases reached the United States, I knew there would be a very real impact on sales tax revenue and the ability for governments to provide services to their citizens. When states begin instituting stay at home orders to combat the spread of COVID-19 throughout the United States, the purchasing behavior of individuals in quarantine changed dramatically.
Purchases of cleaning supplies, groceries, face masks, and gloves increases, with purchases of frozen meat increasing 101 percent over the March 9th to April 5th time frame. However, groceries are not subject to any sales taxation in 35 states in the United States and taxed at a reduced rate in 6 states.
Therefore, 41 states in the United States were not obtaining additional revenue from the panic buying. For a state such as Florida, that depends on sales taxation for 70 percent of its total income, a 25 percent reduction in sales tax collection for March is a cause for concern.
My colleague at North Carolina State University and I set out to fully understand the impact of the reduction in sales tax revenue on the fiscal health of county governments in both North Carolina and Florida.
Fiscal health of a government can be thought of similar to personal fiscal health, the ability of the government to meet its current spending needs with the income currently being collected along with any savings or reserves.
Individuals like county governments have to make tough decisions when spending exceeds revenue; individuals might cancel their Netflix membership; governments might have to discontinue overtime pay for firefighters.
Our research found in both North Carolina and Florida the longer that the counties experienced a decline in sales tax revenue and the larger the percentage of the decline, the greater the threat for the county governments to both respond to the virus and remain solvent.
We found that if the impact was only a 25 percent reduction in sales tax revenues from March 1st to June 30, 2020 the decline in sales tax revenue for the average county in North Carolina was the same as the salaries of 38 sheriff deputies within that county.
Even if COVID-19 had no impact on sales tax revenues for counties within the state, 14 counties within the state of North Carolina were projected to spend more than the revenue they would collect from all sources, of which sales tax revenue represents on average 30 percent.
If the duration of the sales tax revenue loss extends until December 2020, 40 counties within the state of North Carolina will be operating with a deficit. If sales tax revenues continue to experience a loss into 2021, numerous counties within the state will have to potentially consider cutting services to meet financial obligations. All of these findings held expenditures by county governments constant over the time period.
Counties within the state of Florida are also facing fiscal hardship due to declining sales tax revenues. However, unlike North Carolina, Florida has not passed legislation for the taxation of sales by remote vendors.
When a Florida resident purchases an item from a company that has no physical presence within the state, no sales tax is collected. As a recent survey found that 80 percent of those surveyed in the United States were visiting businesses less frequently because of the pandemic and 45 percent are ordering more online.
As over 60% of state sales tax revenue come form in-person sales in Florida, this change of behavior is especially challenging for counties within the state that depend on the tax revenue.
Our research found that if Florida counties experience a 50 percent decline in sales tax revenue between March 1st and June 30, 2020, 11 of the 67 counties are financially very stressed and potentially unable to provide core services and program.
Even with a more moderate 25 percent reduction in sales tax revenues, the average county will lose the equivalent amount of money as 190 governmental employees’ salaries.
If the reduction in sales tax revenues extends to June 30, 2021 at 25 percent, 47 counties within the state of Florida would either be susceptible to financial concern or in a case where they could potentially not meet their obligations.
As no one knows the duration of the impact of COVID-19 upon the spending habits of citizens of the United States, my joint research cannot speak to the exact impact upon local government fiscal health. What I can say is counties in North Carolina and Florida may potentially have to make tough decisions regarding programs provided and potentially furloughs as the duration of the impact of the losses increases.
Perhaps the tough decisions might encourage you into my passion: caring about how governments make money.
