INSIGHTS: NEW CENSUS DATA SHOWS STATES BEAT REVENUE EXPECTATIONS IN FY 2020
Guest Columnist: Jared Walchak, Vice President, State Projects at the Tax Foundation. Reprinted with permission.
- State tax collections declined 5.5 percent in FY 2020 according to new Census data, though actual losses are likely to be significantly lower after accounting for the shifting of income tax collections into the current fiscal year due to delayed tax filing deadlines.
- After a sharp initial drop under stay-at-home orders, sales tax collections have rebounded, closing the year down 0.3 percent with indications of growth in early FY 2021.
Individual income tax collections dropped 10.1 percent year-over-year, but most of this can be attributed to timing effects. However, states should expect sluggish income tax collections in FY 2021.
- Corporate income taxes plummeted 17.5 percent in FY 2020 as businesses went into the red, but fortunately for states, they account for less than 5 percent of state tax revenue.
- Other state taxes suffered as the activities they tax—driving, tourism, and entertainment among them—came to a standstill, and these may take time to recover.
- Local sales and property taxes have proven highly resilient thus far, though municipalities which impose local income taxes may experience distress as employees work remotely from outside their borders.
- The latest tax collection data are consistent with prior projections of FYs 2020 and 2021 underperforming initial projections by just under $200 billion (a decline of $121 billion compared to a FY 2019 baseline), which would represent a loss of far lower magnitude than many initially feared.
New U.S. Census data shows state tax collections down 5.5 percent in FY 2020, driven by a dismal final quarter (April through June) as states began to feel the impact of the COVID-19 pandemic. After accounting for revenues shifted into the current fiscal year due to delayed income tax filing and payment deadlines, all indications are that the overall decline was in the low single digits—not desirable, certainly, but far better than many feared.
Sales taxes appear to have rebounded, while income tax collections have benefited from federal relief and stimulus spending in the Coronavirus Aid, Relief and Economic Security (CARES) Act. And, while local tax data are incomplete, there is good reason to believe that municipal governments are weathering the crisis well thus far.
Overview of the New Data
In the final quarter of FY 2020, revenues were a full 29.0 percent lower than they were in the same quarter one year prior, yielding a decline in annual collections of 5.5 percent. Yet, as bad as that is, the figures offer several glimmers of hope and further bolster the growing realization that state revenue losses are considerably more manageable than many feared in the early days of the pandemic.
Although the hit to FY 2021 revenues is expected to be steeper than the FY 2020 decline—since much of FY 2020 was already in the books when the pandemic hit, and some of the losses from the early days of the pandemic will not show up in state tax revenues until later—these new figures enhance our understanding of the scope of the impact on state revenues. These projections are largely consistent with our earlier estimates that states will experience revenue losses of slightly less than $200 billion in aggregate across FYs 2020 and 2021 compared to initial projections ($121 billion against a FY 2019 baseline).
Sales tax collections took a sharp dip in the final quarter of the fiscal year, but robust collections earlier in the year yielded annual collections almost perfectly on par with FY 2019, and early indications are that sales taxes have recovered nicely in the early months of the new fiscal year.
Income tax collections are more complicated, with individual income tax revenue provisionally down 10.1 percent year-over-year, a figure that is likely to be dramatically overstated due to most states’ decision to delay income tax deadlines from April to July, shifting a fair amount of the revenue into the subsequent fiscal year (beginning July 1).
Corporate income tax revenues plummeted, with states only bringing in half as much corporate tax revenue in the fourth quarter of FY 2020 as they did the same quarter in FY 2019, since corporate income taxes are imposed on net revenue and many companies found themselves in the red early in the pandemic. The drop was enough for corporate income tax collections to close out the year 17.5 percent lower, though this figure is also subject to revision (though much more modestly) due to delayed filing and payment deadlines.
States have little reliance on property taxes—which are mostly imposed at the municipal level—but those that exist at the state level were quite stable, while the remaining state taxes were a mixed bag, with some excise tax revenues vanishing as the activities they tax (like travel, lodging, and entertainment) largely dried up. Once delayed income tax payments are accounted for and shifted to FY 2020, the decline in state tax revenue between FY 2019 and FY 2020 should drop from 5.5 percent to the low single digits.
State Tax Revenue Performance, FY 2019 vs. 2020
Sales Tax Revenues
Sales tax revenues only declined 0.3 percent from FY 2019 to FY 2020 despite the final quarter’s receipts coming in 17.3 percent lower than those in the last quarter of FY 2019. Flat collections—a relief under the circumstances—can be attributed to robust sales tax revenues earlier in the year, with collections up 6.4 percent over the prior year’s totals for the first three quarters. This reflects both a strong economy prior to the pandemic and states’ continued success generating revenue from remote (online) sales as their post-Wayfair remote seller and marketplace facilitator regimes hit their stride.
The 17.3 percent decline in the final quarter of FY 2020 would be alarming if there were good cause to believe the slide has continued into the current fiscal year, but all available evidence—Census data, a smattering of monthly receipts from select states, and industry reports—shows a strong rebound in consumption and taxable sales beginning in June. (Due to the timing of sales tax remittances, the revenue recovery would begin to show up in July.) Retail sales plummeted at the height of business closure orders and stay-at-home mandates, but the decline did not last.
Census data on retail sales and food services shows sales trending about 4.6 percent higher than the previous year for January and February before dipping in March and plunging in April, when retail volume was 19.9 percent lower than the same month the previous year. Overall retail sales were down 7.7 percent in the fourth quarter compared to the same quarter in the previous fiscal year, and this understates the impact on taxable sales, since many people were stockpiling groceries and other largely untaxed items at the time.
By June, however, monthly sales tax collections were again higher than they were the same month the previous year, and they have remained so through August (most recent data). While any number of factors—the expiration of benefits, another wave of the virus, a new round of business closures—could cause sales volume to decline again, for now the data are consistent with a steep but relatively brief dip in taxable sales, with sales and use taxes poised to perform well in FY 2021.
Income Tax Revenues
Income tax revenues in the final quarter of FY 2020 came in extremely low. Individual income tax receipts were 38.7 percent lower than they were a year previously, and corporate income tax collections were down 50.9 percent, resulting in year-over-year declines of 10.1 and 17.5 percent, respectively. Particularly with individual income taxes, however, this is largely the consequence of delayed collections due to postponed filing deadlines, not an actual decline in receipts associated with the fiscal year.
The majority of income tax collections in the final quarter of a traditional state fiscal year (ending in June) are typically derived from income earned the previous tax year (in this case, tax year 2019), on which final payments are generally due April 15th. While withholding and quarterly estimated payments keep income tax revenues flowing throughout the year, Tax Day remains very important for state revenues—and in all but three states with an income tax, this year’s tax filing deadline was pushed into July, the subsequent fiscal year.
Consider Colorado as an example. In April 2019, the state brought in $1.82 billion in individual income tax revenues, but in April 2020, a billion dollars were shaved off collections, with the state only garnering $819 million. The revenue did not disappear, however; it showed up in July receipts, after the end of FY 2020, where this year saw the state bring in $1.76 billion, compared to only $614 million last year. All told, state individual income tax receipts were 3.4 percent higher for the four months from April to July in 2020 than they were in 2019; only the timing changed.
Or take New York, a state that has been particularly ravaged both by the virus and a worker exodus in its wake—many temporary, some not. New York is unusual in beginning its fiscal year in April rather than July. The state only brought in $8.63 billion in individual income tax collections between April and June, corresponding with the final quarter of FY 2020 for most states, barely half the $16.91 billion the state raised in those same months the previous year. By August, however, the gap had closed substantially—to $21.59 billion compared to $23.15 billion the previous year. New York is still in a hole, but a snapshot of income tax collections through the end of June does not paint an accurate picture.
After shifting delayed collections from tax year 2019 into the FY 2020 budgets (out of FY 2021), what appears to be a stark revenue decline all but disappears. That is the good news. The bad news, unfortunately, is that the major income tax revenue losses should show up in FY 2021, not FY 2020. While income tax withholding and estimated payments are remitted throughout the year, a sizable amount of tax obligations incurred during 2020 will not be paid until April 2021, toward the end of the current fiscal year.
Income tax receipts will, however, be propped up by unemployment compensation, and particularly by the $600 per week Pandemic Unemployment Assistance (PUA) program and its $300 a week successor, since unemployment benefits constitute taxable income. The Paycheck Protection Program (PPP) and other federal aid programs have also served to maintain incomes. The role of both these programs, not only in aiding workers and their employers, but also in enhancing state revenues, has been underappreciated. Boosted by federal relief spending, personal income in the final quarter of FY 2020 was consistent with $20.40 trillion in annual income nationwide, compared to $17.75 trillion the same quarter the previous year.
Corporate income tax receipts, by contrast, are likely to be disappointing throughout FY 2021 as many businesses continue to post losses or demonstrate only modest profits, limiting their tax liability. This extreme volatility is an inherent problem of corporate income taxes, so it is fortunate that corporate income taxes account for less than 5 percent of state tax revenue nationwide.
ON THE ECONOMY: NOBODY’S KNOWN THE TROUBLE I’VE SEEN
John Dunham, Managing Partner, John Dunham & Associates
Nobody knows the trouble I’ve been through. Nobody knows my sorrow. Nobody knows the trouble I’ve seen. Glory hallelujah! Sometimes I’m up, sometimes I’m down. Oh, yes, Lord, sometimes I’m almost to the ground. Oh, yes, Lord, although you see me going ‘long so, Oh, yes, Lord, I have my trials here below.
These lyrics begin an African-American spiritual song that originated during the period of slavery but was not published until 1867. The first successful recording was made by Marian Anderson, in 1925; however, it has been recorded by dozens of artists since then. Many of the songs of this period represented the difficulties in the Southern states, and depicted hidden messages, with veiled protests against anarchy and slavery. Nobody Knows the Trouble I’ve Seen expresses the pain suffered by the slaves and offers them hope through religion.
While it would be inappropriate to compare the trouble of forecasting the economy to the suffering of individuals, the lyrics do ring true to this profession. For predicting the fate of the economy right now is sometimes up and sometimes down. This is because all economists, from Nobel Prize winners to our little band, use models based on trends. They may be simple models that assume that something will go on forever just as it has in the past, or they may be more complex, and combine many different trends together. They may include different functional forms of trends and complex mathematics, but in the end, all economic forecasts are based on data from the past.
This reality is why it is so difficult to understand what will happen to the economy tomorrow, or next Tuesday, or 5-years out. In effect, every forecasting model is floating in uncharted territory.
The reasons for this are threefold. First, the data that models rely on is generally suspect at the moment. The data collection methods that have been used for decades don’t work in the same way as they do during normal economic conditions. The unemployment data collected by the Bureau of Labor Statistics contradicts itself, and inflation data relies on collecting information from retailers, many of which have been going out of business and deeply discounting items simply to raise immediate cash. Other data are simply not available in a timely manner because the people and institutions that collect them are either closed or operating at minimal staffing levels.
Not only are the data suspect, but the coefficients (in effect the relationships between data) are also based on normal economic conditions. Model equations work best in a small range on either side of a mean – or average – value. As model equations move further and further away from their central values, they become less and less reliable.
Finally, the relationships between different parts of the economy have broken down. With entire sectors of the economy closed, the pathways between different parts of the economic machinery are simply not functioning. This means that the general theories that economists use to devise models simply do not describe the current reality. It does not matter if one is a Marxist, Keynesian, neo-classical, or monetary economist, their theories no longer work. Those who understand economic history are able to apply different theories to different situations; however, when a situation has never happened in the past, there simply is no theory to describe it.
Looking at the current situation, the closest parallel in recent history was the demilitarization and retooling of the economy that occurred following World War II. At the time, there was a brief and deep recession as industries shut down for a short while to retool for civilian production. But that was being done in anticipation of a rush of future business. In this case, the economy has not shut down for retooling, but simply because it has not been allowed to open. This has never happened. Sure the economy shut down in the past. Following 9/11 the economy stopped but that was only for a few weeks. The same was true during the Apollo 11 landing, but that was just for a few hours. France shuts down every year, but that is for a month. Never has the entire world (save for Sweden) completely shut down for months. No model, no economic theory, no data, describe this sort of event.
This is all to say that everyone should be leery of those who are adamant in their statements about the economy, even big-name economists at the Federal Reserve or the Congressional Budget Office, or the Council of Economic Advisors. There may be inflation, there may not. Gold may skyrocket, it may not. A COVID vaccine may lead to faster growth, it may not. And there may be a W shaped recovery, or a V shaped recovery or a whatever shaped recovery, or there may not. As of now, economists simply do not have the tools that they need to really understand what is going on.
As economists do their best to understand the effects of the government-imposed shutdowns, all that I can say is, Oh, yes, Lord, I have my trials here below.