States See Financial Doom on the Horizon
States rely on sales tax revenue to cover most of their costs: roads, schools, salaries for state workers — you name it, the costs of most states are covered by sales tax. Since the end of Quill, most states have taken the opportunity to collect sales taxes on transactions by out of state sellers, increasing the importance of sales tax within their states.
With the COVID-19 pandemic, states are taking in a lot less sales tax. Non-essential businesses, personal services, and the entire hospitality industry have shut down across the nation, and states are taking a hit just as business owners and employees are.
Most states usually get an influx of income tax payments in April, but this year the deadlines for filing income tax in most states have been extended to July. Many states also get a big boost from Spring Break and summer tourism. That too is off the table this year. Staying at home is saving families plenty on travel this year, and significantly reducing income for states.
Oil prices are plummeting, affecting a number of states that can usually rely on oil income. Manufacturing has also taken a tumble, with productivity falling further than it has since 1946.
So with tourism, services, hospitality, oil, and manufacturing producing so much less revenue for states, they just have to tighten their belts, right?
Unfortunately, states have also been hit with increased costs in response to the pandemic. They’re having to help with medical costs, unemployment compensation, additional welfare expenditures, and more. Some states are borrowing money or moving funds from one basket to another in the short run. However, increased unemployment and the likely collapse of businesses means states can’t foresee how long a run there will be for the economic consequences of the pandemic.
E-commerce sales volume has increased by 74% since March. States will be eager to get their part of this. Some states have waived fees and penalties for companies that can’t pay their sales taxes on time, but few are allowing late filings. We would not be surprised to see audits, especially of remote sellers.
Many states are borrowing money, hoping that things will get back to normal soon, or that they will have federal loans forgiven. This isn’t exactly a solution.
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