State tax revenues in some parts of the U.S. are rebounding as the economy emerges from the coronavirus lockdown, a positive sign for governors and mayors who had been bracing for the biggest fiscal crisis in decades.
August sales-tax receipts in hard-hit New Jersey rose 3% from a year earlier and non-partisan legislative analysts are forecasting that revenue will exceed Governor Phil Murphy’s projections by $1.4 billion for the fiscal year. California’s revenue is exceeding forecasts, Georgia’s collections are on the rise and Ohio’s Cuyahoga County -- home to Cleveland -- dodged almost all of the devastating blow it once predicted.
The figures are an early sign that the worst economic collapse since World War II may not decimate governments’ revenues as badly as some feared, potentially reducing the scale of budget cuts and tax increases that would exert a drag on the nation’s recovery. It’s also providing comfort to investors in the $3.9 trillion municipal-bond market who had anticipated that Congress would come through with hundreds of billions of dollars in aid, a prospect that is seen as increasingly unlikely until at least after the November election.
“There is no impending existential fiscal crisis that states are facing,” said Ty Schoback, a senior municipal analyst at Columbia Threadneedle Investments. “That being said, we know from past recessions, states and locals experience a lagged effect on their tax revenues. So it’s not to say they’re in the clear as budget challenges will certainly persist.”
States and cities are still contending with large budget shortfalls and government officials caution that the good news may be fleeting, given that the disappearance of enhanced unemployment benefits or a resurgence in the coronavirus outbreak could deal another setback to the economy. And because of the lag with which income taxes are collected, states have historically continued to face big deficits well after recessions end.
Beating Expectations
But so far, some are seeing that their tax base didn’t erode as much as feared. California’s revenue exceeded its estimates by $3.4 billion in July and August, giving the government 9% more than the budget reflected. Georgia’s personal income-tax revenue rose 10% in August from a year earlier. And Cuyahoga County, which projected a 20% decline in sales-tax revenue, has seen collections fall just 1.6% through June.
“The numbers are coming in way better than we anticipated,” said Walter Parfejewiec, the budget director for the county. “We were assuming the numbers would be down the remainder of the year.”
Preliminary figures from 40 states show total state tax revenues were down by about $28 billion, or 7.5%, from March through July, the first five months of the pandemic, compared with the same period a year earlier, according to the Urban Institute. In fiscal year 2009, in the midst of the Great Recession, state tax revenue declined 8%, according to the National Association of State Budget Officers.
Look Ahead
Yet that doesn’t mean the toll is behind states, since full income-tax payments for 2020 income won’t be made until next year, said Brian Sigritz, director of state fiscal studies for the budget officers group.
“The expectation is still that the worst is yet to come,” Sigritz said.