OPINION: State sales tax is in trouble, and operating state government will become more difficult. Even as the economy reopens, states are facing an uncertain revenue path unlike any we’ve seen since the Great Depression.
States and localities across the country are facing an unprecedented fiscal situation from the economic shock of the COVID-19 pandemic. Governors are confronting drastically falling revenues and rising costs. Prior to the onset of the COVID-19 pandemic, most states were generating solid revenue growth. And many built up robust rainy day funds.
This year, the federal government and most states delayed their income tax filing deadlines from April 15 to July 15. Normally, estimated and final payments made at that April 15 deadline represent about 30% of annual total personal income taxes. In a typical year, states collect about 40% of these nonwithholding revenues in the month of April.
But there was wide variation. Seventeen states reported that withholding increased in April compared to April 2019, while 16 states reported single-digit percentage point declines, and another 5 states suffered double-digit declines. Declines of such magnitude are alarming, particularly since most states announced stay-at-home mandates late in March. As a result, we expect steeper declines in May sales-tax revenues due to severely reduced consumer activity.
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