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Estimates of State and Local Government Revenue Losses from Pandemic Mitigation

(PDF PDF icon) | (APPENDIX PDF icon) | ISSN 2691-9710 | DOI: 10.26509/frbc-ddb-20200513

This data brief presents estimates of the impacts of the COVID-19 mitigation shutdowns on US state and local income and sales tax revenue. I estimate that revenues will decline by $54 billion in fiscal year 2020 (FY20). Depending on the speed of the recovery over the next fiscal year, another $25 billion to $137 billion of revenue may be lost. If states split their rainy day funds between FY20 and fiscal year 2021 (FY21) to offset these revenue declines, the shortfalls would be reduced to $21 billion in FY20 and $4 billion to $78 billion in FY21.

While every revenue stream collected by state and local governments will probably be reduced by the current economic slowdown, the estimates here focus on the two largest sources: individual income taxes and sales taxes. Together, these taxes account for 60 percent of the revenue states collect. I have used the Current Employment Statistics (CES) and National Income and Product Accounts data to estimate the declines in the income and sales tax bases.

I calculated the declines in industry employment from February 2020 to April 2020 using the BLS Employment Situation Table B-1, which is based on the CES.1 I matched these declines to industries in the Occupational Employment Statistics (OES).2 I estimate the reduction in employment in each occupation and state by multiplying the industry employment declines by the number of employees in each occupation within the industry. I then multiplied the occupation declines by the occupation’s mean earnings and arrive at an estimated decline in the state’s income tax base. The implied declines in the income tax base varied from 11 percent to 15 percent among states and averaged 12 percent. The variation is driven by differences among states in industry concentrations and occupational earnings.

As an example of how the CES data are used to estimate the decline in the income tax base, consider waitstaff in Ohio. The CES data show a 47 percent decline in the number of employees working in the “food and drink places” industry (NAICS 722). Nationally, “food and drink places” employ 87 percent of all waitstaff. Applying the industry decline to the total earnings of waitstaff in Ohio who work in food and drink places (the count times the average earnings) suggests a loss of $877 million in earnings. I sum these losses for all industry-occupation combinations, and it suggests a decline of $29 billion. This is 11 percent of the total earnings observed in Ohio in the OES data, so I estimate that Ohio income tax revenue will decline by 11 percent.

CES decline in “food and drink” industry employment * Share of waitstaff who work in “Food service and Drinking Places” industry * Number of waitstaff in Ohio * Mean annual earnings of waitstaff in Ohio = Decline in income tax base in Ohio
-0.47 * 0.87 * 94,720 * $22,650 = -$877M

To estimate reduced sales tax revenue, I used the “Personal Consumption Expenditures by Type of Product” table from the National Income and Product Accounts.3 I selected the line items that are usually subject to sales taxes and observed a 4 percent decline in total expenditures on these line items from 2019:Q4 to 2020:Q1 (seasonally adjusted). I assume all of this decline is due to the shutdowns and it all occurred in the final two weeks of the quarter. This suggests taxable sales declined by 26 percent in these last two weeks. There is no geographic variation in the estimated decline of sales.

Data on state and local finances are collected every five years by the Census of Governments (COG).4 I inflation-adjusted the most recent income and sales tax revenues for each state and local government (Census of Governments 2017) and applied the income and sales tax declines. The COG revenue figures include revenues flowing into all funds, not just the government’s general fund. While most discussion of state and local budgets focuses on general funds, using the broad COG definition reflects that revenue losses in other funds might also create urgent demands for resources. Almost all states end their fiscal years on June 30, and this means that they had accrued or collected 73 percent of their FY20 revenue before shutdowns began in mid-March 2020.5 They will be collecting taxes from their reduced tax bases during the last quarter of FY20. The estimation calculations assume earnings and sales are suppressed throughout the quarter, but states are beginning to allow some businesses to reopen. To the extent that earnings and sales rebound during this quarter, the realized revenue losses will likely be less than is estimated here.

In table 1, I present the income and sales tax revenues that are likely to be lost in the remainder of FY20. These total $42 billion. The losses range from 0.3 percent (Alaska) to 5.5 percent (Texas) of annual own revenue. Because most states operate under balanced budget requirements, they will be forced to reduce spending by an amount equal to the revenue decline during the single remaining quarter of FY20. For example, a state that loses 4 percent of its annual revenue during the fourth quarter must cut 16 percent of the spending it planned to do during that quarter to finish the year in balance.

State governments maintain rainy day funds (RDF) and other unallocated assets that can be used to smooth through declines in revenue. The National Association of State Budget Officers publishes these fund balances annually.6 Because FY21 is very likely to be a financially difficult year for states, I have assumed that they will use half of their RDFs in FY20 and the other half in FY21.7 The last column of table 1 presents the revenue losses that would not be covered by the RDFs. This substantially reduces revenue shortfalls to $9 billion.

The lost revenue for local governments is presented in table 2. These estimates are calculated the same way as the state estimates except that I used OES data for the local governments’ metro or rural areas instead of the state-level data. The total estimated forgone revenue for local governments in FY20 is $12 billion. Local governments also maintain RDFs, so the need will be lower than this total implies. However, no good measure of these funds is available, so I am unable to adjust the figures.

Table 3 presents estimates of the FY21 lost revenue under three scenarios. The most optimistic scenario assumes that businesses will begin reopening in May 2020, that most businesses have survived the shutdowns, and that furloughed employees will return to their former employers. In this scenario, the income and sales tax bases reverse half of the shutdown decline by July 2020, and the recovery is complete by October 2020. For the second scenario, I assume the income and sales tax bases take four quarters to recover. This is modeled on the experience of the Great Recession. Personal income reached its recession low in 2009:Q1, and it took four quarters to return to its previous high. Consumer expenditures hit their trough in 2009:Q2 and took three quarters to recover. In the last scenario, I assume half of the declines are reversed by July 2020, but a resurgence of the virus forces the shutdowns to be reimposed in October 2020. The slow recovery described in the second scenario then begins in 2021.

Under the most optimistic scenario, states and local governments will lose $25 billion in revenue in FY21. They are estimated to lose $73 billion if we experience a slow recovery and $137 billion if there is a resurgence of COVID-19. Again, a portion of this can be offset by RDFs, but a majority will have to be matched with spending cuts unless state and local governments receive grants or raise taxes.

Why don’t these estimates match my state’s announced budget cuts?

These estimates are meant to arrive at the scale of the national aggregate losses. They apply a uniform estimation technique to standardized data so that the relative size of the challenges facing the states can be assessed. They may differ from announced budget cuts for reasons including the following:

  • State revenue offices have microdata on their states’ tax payers that is not publically available. This detailed data may support higher or lower revenue forecasts.
  • States may be forecasting increased revenues in May and June 2020 as businesses reopen. They may announce further cuts if the revenues remain low.
  • Tax revenues may have been above or below projections earlier in FY20.
  • The estimates here are based on inflation-adjusted values from FY17. A state’s actual revenues may have grown faster or slower than inflation.
  • States may have changed their tax rates and mix of revenue sources since FY17.
  • States may have options to offset revenue shortfalls in addition to using RDF. For example, they may delay payments to vendors or push an employee pay period into FY21.

Table 1. Estimated declines in state revenue in FY20 ($ millions)

Revenue type Total losses as share of1 Losses beyond
50% of RDF
  Income Sales All Revenue Own Revenue
Alabama 166 547   2.5 3.9 137
Alaska - 18   0.2 0.3 -
Arizona 130 641   2.0 3.4 229
Arkansas 85 327   1.8 2.9 335
California 2,586 3,584   2.0 2.9 -
Colorado 207 367   1.9 2.8 51
Connecticut 239 486   2.4 3.3 -
Delaware 36 39   0.8 1.2 -
Florida - 2,371   2.6 3.8 994
Georgia 331 613   2.0 3.1 -
Hawaii 81 304   2.7 3.4 -
Idaho 52 155   2.2 3.2 -
Illinois 395 1,296   2.3 3.3 1,382
Indiana 169 766   2.3 3.6 -
Iowa 111 321   1.7 2.2 -
Kansas 70 299   2.0 2.6 32
Kentucky 137 393   1.7 2.9 378
Louisiana 92 471   1.9 3.5 348
Maine 50 151   2.2 3.4 -
Maryland 264 643   2.0 3.0 261
Massachusetts 439 613   1.7 2.5 -
Michigan 447 1,430   2.7 4.0 1,554
Minnesota 332 738   2.4 3.3 -
Mississippi 58 344   1.9 3.4 112
Missouri 189 376   1.8 2.9 91
Montana 38 40   1.1 2.0 -
Nebraska 67 167   2.2 3.2 -
Nevada - 482   2.9 4.5 114
New Hampshire 2 67   0.8 1.3 18
New Jersey 409 985   2.0 2.8 761
New Mexico 42 213   1.4 2.5 -
New York2 - -   - - -
North Carolina 370 814   2.0 3.0 -
North Dakota 10 94   1.5 2.1 -
Ohio 254 1,304   2.1 3.2 -
Oklahoma 97 262   1.5 2.3 -
Oregon 265 106   1.1 1.7 -
Pennsylvania 364 1,403   1.9 2.9 1,508
Rhode Island 39 118   1.8 2.8 51
South Carolina 133 323   1.5 2.3 -
South Dakota - 106   2.3 3.6 11
Tennessee 8 696   2.2 3.6 145
Texas - 4,893   3.6 5.5 108
Utah 110 246   1.8 2.4 -
Vermont 24 74   1.5 2.2 -
Virginia 376 481   1.7 2.1 166
Washington - 1,333   2.6 3.8 89
West Virginia 56 186   1.8 2.9 -
Wisconsin 237 555   2.1 2.8 1
Wyoming - 53   0.9 1.6 -
Total 9,567 32,294       8,876
  1. “All Revenue” includes collections by the state and federal transfers. “Own Revenue” excludes federal transfers.
  2. New York’s FY20 closed on March 31, 2020, so it is not impacted in the estimation scenario.

Sources: Census of Governments, Occupational Employment Statistics, National Association of State Budget Officers, National Income and Product Accounts, Bureau of Labor Statistics Current Employment Statistics, and author’s calculations.

Table 2. Estimated declines in local government FY20 revenue ($ millions)

Revenue type Jurisdiction Type
Income Sales City and Town County Schools Special
Alabama 4 286   234 56 - -
Alaska - 28   22 6 . -
Arizona - 236   199 22 - 15
Arkansas - 140   86 54 - -
California - 1,409   964 95 - 350
Colorado - 519   377 64 - 78
Connecticut - -   - . - -
Delaware - 1   - - - -
District of Columbia 85 189   274 . . -
Florida - 628   237 339 52 -
Georgia - 391   69 193 128 -
Hawaii - 30   25 5 . -
Idaho - 5   4 1 - 1
Illinois - 519   247 149 - 123
Indiana 28 13   18 23 - -
Iowa 3 42   28 8 8 -
Kansas - 143   92 50 - -
Kentucky 45 50   58 15 22 -
Louisiana - 405   153 111 131 10
Maine - -   - - - -
Maryland 158 67   26 198 . -
Massachusetts - 29   28 1 - -
Michigan 17 20   32 5 - -
Minnesota - 45   37 9 - -
Mississippi - 12   9 2 - -
Missouri 5 278   159 117 - 7
Montana - 1   1 - - -
Nebraska - 50   46 1 3 -
Nevada - 118   15 102 - -
New Hampshire - -   - - - -
New Jersey - 17   17 - - -
New Mexico - 84   56 26 - 2
New York 357 1,627   1,038 942 2 -
North Carolina - 231   82 150 . -
North Dakota - 28   22 6 - -
Ohio 251 282   255 217 13 48
Oklahoma - 165   134 31 - -
Oregon - 40   32 8 - -
Pennsylvania 178 110   190 16 81 2
Rhode Island - 2   2 . - -
South Carolina - 61   25 36 - -
South Dakota - 41   39 - 2 -
Tennessee - 192   83 108 - -
Texas - 1,005   734 66 - 206
Utah - 121   54 67 - -
Vermont - 2   2 - - -
Virginia - 210   105 104 - 1
Washington - 564   257 159 - 148
West Virginia - 9   6 2 - -
Wisconsin - 52   9 37 - 7
Wyoming - 8   2 7 - -
Total 1,131 10,505   6,584 3,608 442 998

Sources: Census of Governments, Occupational Employment Statistics, National Income and Product Accounts, Bureau of Labor Statistics Current Employment Statistics, and author’s calculations.

Table 3. Declines in income and sales tax revenue under alternate scenarios ($ billions)

FY20 FY21
V-shaped Slow Second wave
State 41.9 21.9 63.1 117.1
Local 11.6 2.7 9.8 20.3
State + Local 53.5 24.6 72.9 137.4
States beyond 50% of RDF 8.9 1.5 18.2 57.5
States beyond 50% of RDF + Local 20.5 4.3 27.9 77.8

Sources: Census of Governments, Occupational Employment Statistics, National Association of State Budget Officers, National Income and Product Accounts, Bureau of Labor Statistics Current Employment Statistics, and author’s calculations.


Footnotes

  1. Bureau of Labor Statistics. 2020. “Table B-1. Employees on nonfarm payrolls by industry sector and selected industry detail.” May. https://www.bls.gov/news.release/empsit.t17.htm Return
  2. Bureau of Labor Statistics. 2019. “Occupational Employment Statistics, Table 2.” May. https://www.bls.gov/oes/tables.htm Return
  3. Bureau of Economic Analysis. National Income and Product Accounts, Section 2, Table 2.4.5U. https://apps.bea.gov/iTable/iTable.cfm?ReqID=19&step=2#reqid=19&step=2&isuri=1&1921=underlying Return
  4. Census of Governments. 2017. 2017 State and Local Government Finance Tables. United States Census Bureau. https://www.census.gov/programs-surveys/cog/data/tables.2017.html Return
  5. Only four states end their fiscal year on a date other than June 30: New York (March 31), Texas (August 31), Alabama and Michigan (September 30) Return
  6. National Association of State Budget Officers. 2019. “Fiscal Survey of the States: Overview.” (Fall). https://www.nasbo.org/reports-data/fiscal-survey-of-states Return
  7. If a state’s estimated revenue losses are less than half of its RDF and other unallocated fund balances, I assume it offsets all of the revenue loss in FY20 and carries the remaining funds into FY21. In FY21, it uses as much of the RDF as it needs in each scenario. Return

The views expressed in this report are those of the author and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.

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