State Rundown 5/20: State Revenue Crisis Getting Clearer…and Scarier

State policymakers are navigating incredibly uncertain waters these days as they attempt to get a firmer grasp on the scale of their revenue crises, identify painful budget cuts they may have to make in response, and look for ways to raise tax revenues coming from the households and corporations still bringing in large incomes and profits amid the pandemic—all while hoping that additional federal aid and greater flexibility in how they can use federal CARES Act funds will help relieve some of these difficult decisions.

Major State Tax Proposals and Developments

• CALIFORNIA leaders have unveiled many different actions and proposals in response to the fiscal fallout of the pandemic. Facing a 22 percent drop in revenue compared to the projections undergirding his original budget proposal, Gov. Gavin Newsom has reduced the proposal by $54 billion. Those cuts include 10 percent reductions to school funding, higher education, and state employee pay, cancellation of many planned program expansions, and a plan to reduce the size of the state prison system. Newsom would also suspend some corporations’ ability to write off their losses, cap business subsidy tax credits at 5 percent of a company’s tax liability, and tap the state’s Rainy Day Fund. A two-part proposal from legislators would add to these measures by offering landlords tax credits for forgiving rent payments and raising $25 billion in the short term through an income tax pre-payment program. – DYLAN GRUNDMAN
• Voters in Portland, OREGON, stepped up for their most vulnerable neighbors this week, strongly approving a 1 percent tax on high-income households and large businesses to fund thoughtfully targeted homeless services like rent assistance, employment support, and mental health services. – DYLAN GRUNDMAN

Recommended Reading on Responses to COVID-19 Pandemic

• The latest numbers compiled by the Center on Budget and Policy Priorities (CBPP) now show state revenue shortfalls expected to total $765 billion over three years, with some states projecting losses of as much as 30 percent of their budgets. The Associated Press surveys this landscape nationally and in several individual states.
• CNN Business reports that retail sales saw their biggest decline on record in April, falling 16 percent from March and more than 21 percent from the same time last year. ITEP Research Director Carl Davis weighs in on what that means for state budgets, particularly those that rely heavily on sales taxes to balance their budgets.
• Many of the same states most affected by the drop in retail sales are also among those most vulnerable to the major declines in tourism and mining, as noted by Axios and Brookings. And Route Fifty adds that the oil crash is also creating a “double whammy” in some of these same states.
• Pew and Route Fifty both report, and CBPP argues, that federal aid to cities and counties will need to be a major component of future federal aid in order to avoid worsening and lengthening the job losses and economic damage caused by the pandemic.
• Cortney Sanders of CBPP explains the importance of a strong focus on equity amid the health and economic crisis, particularly in regards to ensuring school funding does not become more separate and unequal, and Rebecca Sibilia of EdBuild argues in the New York Times that a fundamental rethinking of school finance is needed in order to break from the inequities inherent in basing local education funding on local property wealth.
• Pew offers advice on how states can improve flexibility around their Rainy Day Funds to improve responsiveness in crises like the COVID-19 pandemic.
• Bloomberg notes that online sales tax collections are a rare bright spot in state revenue streams (except those in FLORIDA and MISSOURI).
• The unprecedented recent decline in state and local jobs due to the pandemic is pictured graphically by CBPP and covered in more depth by Route Fifty, which also reports on state-by-state differences in unemployment overall.
• Researchers from the London School of Economics have shown that income inequality is a strong predictor of COVID-19 deaths in US states.
• A progressive property tax, under which owners of very expensive homes pay higher rates, is increasingly discussed in fiscal policy circles and included in a list of helpful ideas for overcoming pandemic-induced budget shortfalls by the Washington Post.

State Roundup

• ALABAMA Gov. Kay Ivey signed both the FY21 General Fund Budget and a supplemental appropriations bill that directs how $1.9 billion in federal CARES Act funds can be spent. The Governor’s amendment includes $250 million for health services and $300 million to support citizens, businesses, and non-profits.
• The ARKANSAS Democratic Party proposed child care tax credits and income tax suspension during the pandemic for “essential” taxpayers earning less than $150,000 a year.
• ALASKA lawmakers reconvened this week after action by the Legislature’s Budget and Audit Committee. The committee approved Gov. Mike Dunleavy’s plan to spend the federal pandemic aid, spurring a lawsuit which blocked the funds from being spent without approval from the full Legislature.
• ARIZONA cities and counties are calling on Gov. Doug Ducey to free-up some of the $1.9 billion in federal coronavirus relief funds that the state received to help with dwindling tax collections and rising costs.
• COLORADO‘s budget committee and General Assembly are expecting a $3.3 billion budget shortfall, which amounts to 25.2 percent of the General Fund. Lawmakers are waiting to see if the federal government provides states with relief before making cuts and developing a spending plan when they return on May 26.
• Also, groups in COLORADO are calling on lawmakers to use an “emergency tax” provision within the Taxpayers Bill of Rights (TABOR) that would allow income taxes to be raised temporarily.
• CONNECTICUT leaders are pressing for progressive taxes on the state’s richest households to shore up revenues during the crisis and improve the tax code for the long haul.
• A DELAWARE court has ruled that outdated and differing property tax assessment practices across the state have gone on long enough and declared the system unconstitutional, a victory for advocates of fairer school funding.
• DISTRICT OF COLUMBIA Mayor Muriel Bowser proposed an FY21 budget that relies heavily on savings and surpluses, but excludes new revenue from tax increases. Councilmember Charles Allen introduced the idea of temporary tax increases on households earning over $350,000 to fund priorities not included in the current budget such as rental assistance and violence prevention.
• HAWAII lawmakers announced that they plan to fill the state’s anticipated $1 billion revenue shortfall by using the state’s rainy fund, reducing vacancies in state agencies and by issuing bonds. April collections show general fund tax revenue down one-third from the previous year.
• The ILLINOIS legislature is back in session for three days following pandemic disruptions. While in Springfield, the body hopes to pass a budget for the coming fiscal year, approve ballot language for the Fair Tax appearing before voters on the November 2020 ballot, and pass some additional COVID-19 relief.
• IOWA lawmakers will return to session June 3 and are hoping that a requested revised revenue estimate will give them some clarity on budget negotiations in the meantime.
• The KANSAS legislature is advancing a bill that would require marketplace facilitators to collect and remit taxes when sales to in-state buyers exceed $100,000 a year.
• KENTUCKY agencies have been asked to begin preparing plans for 12.5 percent budget cuts as policymakers anticipate large revenue shortfalls.
• The LOUISIANA House Appropriations Committee continues to advance a bill to cut severance taxes levied on oil and gas companies by more than $112 million over five years. Another measure would suspend franchise taxes for small businesses. Gov. John Bel Edwards opposes the tax cuts, raising concerns over negative impacts on education and health care.
• In other news, the LOUISIANA House Ways and Means Committee approved a bill that would impose tax duties on marketplace facilitators if they have either $100,000 of in-state sales or 200 separate transactions into Louisiana.
• MAINE’s April revenues were down by nearly 50 percent. Experts predict that the state could see revenue losses of up to $1 billion through the middle of 2021.
• MASSACHUSETTS House members filed a new bill that would make personal protective equipment exempt from the state’s sales tax base.
• MICHIGAN budget forecasts project tax revenues to be down by $3.2 billion in the fiscal year and another $3 billion in fiscal year 2021.
• The MICHIGAN Supreme Court held that Detroit income tax applies to services performed in the city for customers located in other localities.
• MINNESOTA lawmakers failed to pass bills providing tax relief and spending before their session adjourned on May 18. Gov. Tim Walz and other leaders, however, expect a $1.1 billion and $1.35 billion bonding bill will pass in a special session in June.
• MISSISSIPPI will distribute $300 million of its $1.25 billion CARES Act funding allocation to support small businesses.
• MISSOURI lawmakers passed a budget last week that assumes additional federal aid will allow them to avoid major cuts to schools and higher education, but will make those cuts in absence of more aid. And Gov. Mike Parson expects funding will have to be withheld as soon as next month. Unfortunately they declined another opportunity to apply their sales tax to online purchases, furthering their fiscal woes and leaving Missouri as one of two remaining states to fail to do so.
• NEBRASKA legislators are letting the revenue picture clarify over the coming weeks before returning to session July 20. Fiscal policy thinktank OpenSky Policy Institute outlines three possible revenue scenarios they may face when they reconvene.
• NEVADA Gov. Steve Sisolak has declared a fiscal emergency in response to the state’s new shortfall estimate, which amounts to up to $911 million in the current fiscal year alone and another $1 to $2 billion shortfall rumored to be likely in the following year. Lawmakers will use the state’s $400 million Rainy Day Fund to fill part of the current-year shortfall and widely anticipate a special session this summer, with painful funding cuts likely. Many in the state are already looking to that special session and beyond to start difficult discussions about more fundamental changes needed to the state’s upside-down and tourism-dependent tax structure.
• Thought leaders in NEW JERSEY are warning against repeating the mistakes of the Great Recession from which the state has struggled to recover due to lawmakers’ unwillingness to consider raising revenues from those who can most afford it.
• In NEW YORK, April tax revenue declined (PDF) by over 68 percent. In immediate next steps, the state is turning to short-term borrowing.
• NORTH CAROLINA House members weighed a range of business tax changes this week. Meanwhile, Senate leadership is identifying key spending priorities in an altered economic reality. In a recent report, North Carolina’s Budget and Tax Center makes the case (PDF) for revenue options.
• NORTH DAKOTA announced that April sales tax collections were only 0.1 percent below forecast—the state will be watching sales tax collections closely as they fund more than 40 percent of the general fund.
• The former executive director of the OKLAHOMA Tax Commission said that businesses could be at risk of losing state tax deductions, exemptions, credits, and other incentives due to the toll the coronavirus pandemic has had on payroll and hiring. A bill that would provide relief for recipients of Quality Jobs Program incentives is currently on the governor’s desk.
• OKLAHOMA Gov. Kevin Stitt vetoed a bill that would have cut the amount of Oklahoma Affordable Housing Tax Credits offered by the state from $4 million to $2 million citing concerns from residents and the bill’s impact on projects under contract due to it being retroactive.
• Property tax and rent rebate checks will go out to PENNSYLVANIA seniors and individuals with disabilities early this year to help ease some financial burden of those beneficiaries. Meanwhile, the state’s transportation budget faces a $1 billion revenue shortfall.
• A new report from RHODE ISLAND’s state budget office projects a $235 million revenue shortfall this fiscal year. Lawmakers are working to determine what can be done in the next six weeks to address the gap.
• SOUTH CAROLINA Gov. Henry McMaster signed a $155 million coronavirus relief package to help support statewide virus testing. State lawmakers will not adopt a new budget until this fall.
• There is currently a debate brewing in TEXAS about whether or not local governments can raise their property tax rates beyond a 3.5% cap without voter approval.
• VERMONT House members agreed on a mid-year budget bill last week that will now move to the Senate for consideration. Gov. Phil Scott has proposed budget cuts of 8 percent for most state agencies and departments.
• An unofficial estimate puts WASHINGTON state’s shortfall at $756 million for the current fiscal year, close to $3.8 billion over the full two-year budget, and $3.3 billion for the following biennium.
• WEST VIRGINIA Gov. Jim Justice has held off spending the $1.25 billion in coronavirus relief funding in the hopes that new federal guidelines will grant states, counties and cities more flexibility in spending the funds to offset pandemic-related revenue losses.
• WYOMING lawmakers approved a $1.25 billion aid package to help blunt the effects the coronavirus is having on businesses and residents. Though lawmakers may wait until the next special session to address new taxes and relief to residents in the form of tax breaks and direct payments.

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