After years of steadily climbing the economic speedometer, three months ago, society slammed the brakes. State and local governments instituted their own, often conflicting or rapidly changing, stay-at-home and business closure orders.
Since then, economic activity rapidly slowed, millions of jobs were lost, and concerns about fish-tailing into a recession abound.
While many are beginning to see a light at the end of the tunnel, financial repercussions will be felt for months to come.
One of those consequences is the depreciation of tax revenues on which state and local governments rely.
Back in April, the Texas Comptroller’s Office announced a drastic — but unsurprising — 9.3 percent drop in sales tax revenues from April 2019. At the time, that was the sharpest drop since January 2010.
This is based on sales and commerce from the previous month, meaning it’s a reflection of the March market — the first month during which significant pandemic-caused changes, both in government policy and consumer activity, widely spread.
In April, the total tax collections dropped even more drastically at 22 percent from the previous year and the total net revenue was down 20 percent.
May quickly painted an even worse picture. Sales taxes collected were down almost 15 percent, total tax collections down over 50 percent, and net revenue down 49 percent. Again, this is largely based on April transactions.
On June 1, Comptroller Glenn Hegar said of the drop, “State sales tax collections declined as a result of efforts to stem the spread of COVID-19 through business closures, crowd limits and stay-at-home orders adopted in the state, as well as a precipitous drop in worldwide demand for oil.”
Motor vehicle fuel tax collections were down 39 and 83 percent in April and May, respectively. This trickled down to the oil production tax as well, which fell 75 percent in May. Oil demand has dropped significantly as demand for ground and air travel nearly evaporated. This, especially, will affect Texas’ Rainy Day Fund as it is significantly financed by excise taxes.
However, this year Texas had better revenue in both January and February than was seen during those same months in 2019.
Total tax collections in January and February were 9.5 and 8.5 percent, respectively, performing better than the same months last year.
Therefore, based on the estimates from the 86th Legislature, the state is 17 percent behind its projected total tax collection in this biennium. That comes to about $4 million.
Notably, this is an imprecise measurement as the state does not keep track of monthly projections, only a total. Thus, collection totals may, and do vary in certain months on average compared with others.
The real actual/projected drop may differ some from the above monthly average comparison depending on the typical revenue collection weight January through May carries.
This drop in tax collections has already resulted in layoffs and furloughs from local governments and some state agencies have been directed by the governor to cut budgets by five percent — although the amount of the budget those agencies make up is small.
The tightening of the public coffers will undoubtedly continue, even if the economy rebounds, which is beginning to show promise but is by no means a guarantee.
But some localities have decided to explore raising property taxes to offset the revenue losses, or even continue ahead with massive expenditures such as Austin and its $10 billion public transportation plan. To pay for it, the council proposed a 25 percent tax rate increase which voters will have to approve in November.
Tying into this development is the Senate Bill 2 “loophole,” which, depending on how things shake out, could permit cities and counties to raise property taxes up to 8 percent without triggering a referendum by voters. The 86th Legislature reduced this limit to 3.5 percent last year, but included a provision in case a disaster declaration was made.
Now, state leaders maintain this section is aimed at physical and not economic damage, which certainly was their intention behind the provision. However, the actual text does not specify its limitation to physical damage.
It’s possible this question is brought before the courts to rule on, but regardless of the ability to raise the taxes, it’s a politically dubious proposition to raise property taxes during a veritable economic downturn, especially one in which millions of Texans have been unemployed for months.
Some lawmakers have suggested penalties for taxing entities that raise property taxes at all, let alone above the 3.5 percent threshold. The City of Dallas already decided against considering such an increase after taking heat from taxpayers.
But one reason these localities are considering such increases, in addition to the operating fund losses, is many are drowning in unfunded pension liability debts. The State of Texas, too, is $76 billion in the hole on its pension obligations.
And so, the tax revenue shortfall is only compounding the financial pressure Texas and its localities are facing. But that’s the risk one runs when maintenance is eschewed.
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Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad watching and quoting Monty Python productions.