States Forecasting Huge Tax Revenue Drops Amid Pandemic

By Maria Koklanaris
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Law360 (April 24, 2020, 7:38 PM EDT) -- Six weeks after the novel coronavirus brought their economies to a screeching halt, states are estimating "precipitous" declines in tax revenue, according to data from the Center on Budget and Policy Priorities.

In a report updated Thursday, the think tank found that states were making dire estimates even before they knew how much their revenues had already fallen, let alone how much they would fall in the future. That is largely because income and sales tax payments that would have been due April 15 are now pushed back to July in order to conform with similar extensions the Internal Revenue Service has made for federal payments.

"We're starting to see states' estimate of what the impact of COVID-19 will be like on their revenues and the results are pretty shocking," Elizabeth McNichol, a senior fellow at CBPP, told Law360. "One thing that strikes me is it is happening much more quickly and the problems are bigger than with the last recession."

Preliminary declines in general fund revenue, which typically comes from broad-based taxes, range from 3% to 15% in states that have made estimates, according to the CBPP data. But that is for the 2020 fiscal year, which for most states included nine full months without COVID-19 and will end June 30. Estimates for fiscal 2021 are expected to be far worse, as much as 25% down, CBPP said.

Sales tax revenue declines are showing up immediately. On Friday, for example, Jeffrey DeWitt, chief financial officer for the District of Columbia, told the district's mayor and council in a letter that he had reduced estimates for sales tax revenue by about $400 million from a prediction he made in February. For fiscal 2020, sales tax revenues are projected to be $342 million less than they were for fiscal 2019, a decline of 21%, DeWitt said.

Income tax declines are beginning to show up as people lose jobs and employers are not withholding taxes, McNichol said. That will eventually get worse.

"A little bit down the line, we will see the impact of the stock market decline because the income tax also covers capital gains and other unearned income," McNichol said. "Wealthy individuals tend to make quarterly payments based on their capital gains. We haven't seen that yet."

Meanwhile, the Pew Charitable Trusts published an analysis Friday that said states were already scrambling for cash in much the same way they did during the Great Recession and the delay in filing and payments for state tax had exacerbated the problem.

One thing in states' favor this time around is that they learned to save, Barb Rosewicz, one of the authors of the Pew report, told Law360. Their rainy-day funds were at a 20-year high.

"I think they're up to about $74 billion now," Rosewicz said. "But with just the predictions of the magnitude of the tax revenue repercussions — they're not a match. No one should think rainy day funds are going to be able to tide states over."

While the COVID-19-induced recession is looking different in many ways from the Great Recession, states will likely turn to the same menu of options, Rosewicz said. They are limited.

"It's this combination of rainy-day funds, federal aid, definitely spending cuts and possibly tax increases," Rosewicz said. "States may wait till later if they have to turn to tax increases."

--Editing by Robert Rudinger.

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