State Income and Sales Tax Revenues Slide in Second Quarter

Today marked the release of both second-quarter GDP and national accounts data and provides a new glimpse into early changes in state and local revenues and spending. All told, second-quarter (Q2) state and local tax receipts came in about 3.8 percent lower than they did in the same quarter a year ago. Income and sales taxes fell considerably while property and excise tax collections remained stable. State and local spending, meanwhile, came in 0.7 percent lower in the second quarter of 2020 than it did in the second quarter of 2019. States are using federal aid, and the expectation of recapturing delayed collections, to keep spending more stable than tax revenues.

Income tax collections were 7.1 percent lower in 2020 Q2 than they were in 2019 Q2, a number which likely overstates the immediate losses, since the postponement of the tax deadline to July 15^th in most states pushed some FY 2020 tax collections into the third quarter of calendar year 2020. At the same time, however, it understates the long-term impact on income tax revenues, since much of this revenue is for income earned during tax year 2019. Withholding and estimated payments are affected by the present economic crisis and are showing up in lower receipts, but the full scope of losses won’t be realized until final payments are due on 2020 taxes.

Sales taxes, meanwhile, plummeted 9.8 percent compared to the same quarter in 2019, a steeper fall for a tax that should also see a faster recovery. Consumption patterns tend to stabilize long before income recovers, and much of the Q2 sales tax revenue losses are due to business closures and stay-at-home orders that have either been lifted or are less stringent now.

Notably, both property and excise tax collections are actually higher in 2020 Q2 than they were a year ago. This doesn’t necessarily mean that the pandemic had an upward impact on revenues, though this may be true within certain discrete excise taxes (like the tobacco tax, for instance). Rather, overall growth trends in collections continued largely unabated. Property taxes are particularly stable because they are typically based on assessed value, and those valuations have not changed during the course of the pandemic.

Overall, tax collections are about 0.5 percent lower in the first half of calendar year 2020 than they were in the same six months of calendar year 2019, though the pre-pandemic growth in much of Q1 will continue to be eroded by losses afterward. While some level of recovery is likely for the remainder of the year, losses will continue to accumulate.

State and local spending declined by about 1.4 percent in the second quarter, which annualizes to 5.6 percent. (Annualization assumes that reductions continue at the same rate for four consecutive quarters.) Since the economy—and government spending—had been growing prior to the COVID-19 pandemic, state and local government expenditures were down 0.7 percent compared to the same quarter a year ago.

Some of this gap between reduced collections and spending will be closed when final income tax collections for tax year 2020 are accounted for. However, states also appear to have avoided proportional cuts to close out FY 2020, relying on reserves, accounting gimmicks, and current and anticipated future federal aid to avoid deeper cuts.

With each new round of data, we get a slightly clearer picture of the extent of states’ fiscal challenges. The picture these new data continue to paint is one of a significant, but not catastrophic, decline in revenues, and with the likelihood that, in the long run, income tax revenues will be down more than sales tax revenues (consistent with their generally greater volatility), despite the unique nature of the early months of the pandemic.

Original Article Posted at : https://taxfoundation.org/second-quarter-gdp-data-state-income-tax-revenue-sales-tax-revenue/