COVID-19 and Sales Tax Revenues
The coronavirus pandemic has infected nearly four million people worldwide, and about half the states are still shut down. There are many uncertainties and questions about COVID-19, but one thing is sure: states and municipalities are facing serious economic consequences.
How serious? Now we are back to uncertainties. The mayor of Little Rock, Arkansas, pointed out that sales tax reporting for Arkansas always lags by two months. Figures for March, when Arkansas reported its first COVID-19 case and shut down a range of businesses, won’t be available until May.
Some data shows trends, though. The city zoo took in $853,000 less during the 2020 Spring Break period than it did last year. The River Market was down $28,000 in Q1 year over year. The Jim Dailey Fitness and Aquatic Center shows a year-over-year drop of $51,000. These income losses will be reflected in lower sales tax revenue for Little Rock.
The state of Arkansas will also see lower sales tax revenues, of course. Arkansas has revised its 2020 forecast to show a loss of $353.1 billion compared with last year’s forecast.
Nationally, retail and food service spending fell by 8.7% in March, according to the Census Bureau. Arkansas saw a drop of 28% in restaurant sales tax collection in April, and a fall of 18% in sales tax collection for automative sales. The state’s total sales and use tax collections in April were only down by 2.8%.
The Arkansas Economic Development Institute expects spending to stay down through the second quarter, even as businesses reopen. Unemployment and a lack of consumer confidence will result in a total Q2 decline in spending of 5.1%, according to their estimates. They predict a return to normal by the end of the year for many industries, including services, household goods, and groceries — but continuing decline for other industries, such as car sales, clothing, and travel.
Pew Research reports that sales tax revenues fell by 15% during the 2008-2010 recession, but they have generally provided a more stable source of income than other taxes. On average, sales tax provides about a third of the budget for states that collect them. Volatility in sales and use tax revenues will certainly create problems for states and municipalities.
What will the solutions be?
Some states and cities are pushing for a fast reopening, even though the safety of doing this is not completely certain. Arkansas will begin to open restaurants on May 11th. There are restrictions, however. For one thing, capacity is restricted to 33%, a figure which won’t cover overhead for many restaurants. The average profit margin is only 3-5% in the restaurant industry as a whole.
Sales tax is collected on sales, though, not on profits. If restaurants are willing to open soon, that revenue source will at least begin to provide a trickle of sales tax collections.
Some businesses will not be able to reopen, or will not stay afloat if they do. Federal help like the Payroll Protection Program will make it possible for some small businesses to reopen successfully. While consumer confidence will also be a factor, sales tax may rebound by 2021.
So far, the federal government isn’t offering much help for cash-strapped states and cities. The stimulus and relief packages passed by Congress included limited funds for states, even though many states have been spending on the assumption that their expenses would be reimbursed. Arkansas will receive $1.25 billion in federal coronavirus relief funds, but they can be spent only on expenses directly related to COVID-19 which were incurred in March or later. The funds cannot be used to offset decreases in sales tax revenue.
Cities as small as Little Rock will receive no direct federal funds.
Little Rock is expecting some government grant funding, though. Again, this money will only be available to help with COVID-19 expenses. It’s important and helpful, but it won’t make up for the lost income.
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