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April 10th Afternoon State Tax Update

5 min readBy: Katherine Loughead

On March 19 we launched a tracker providing a repository of information related to state fiscal policy responses to COVID-19. We are updating the tracker frequently and will be using the Tax Foundation blog to summarize new developments and provide analysis of relevant trends as they emerge. This blog post is part of that series. Past Updates: March 24, March 25, March 26, March 27, and April 2.

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The past four weeks saw most states busy with legislative and gubernatorial activity as policymakers worked around-the-clock—if not always from their usual locations—responding to the immediate public health, societal, and economic implications of COVID-19. Governors declared states of emergency, issued stay-at-home orders, and either requested or directed state emergency funds to be used to prepare for and respond to the pandemic. Many state legislatures quickly authorized the use of state and federal funding for COVID-19 response efforts, explored or authorized rules changes to allow remote voting, and then suspended their legislative sessions.

Others, mainly those states nearing the end of their regular legislative sessions, worked quickly to pass basic budgets for fiscal year (FY) 2021, which begins July 1st in most states, and then adjourned early. Many states that have already adjourned have left open the possibility that a special session could be called later this year to revise budgets or advance other legislation.

FY 2021 Budgets

Among the FY 2021 budgets that have made their way to state governors this past month, many do not include most of the policy and spending changes that were in the works before the present crisis. Even skimmed-down budgets that have reached the governor’s desk are likely to see line-item spending reductions, and many major taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. changes have been delayed.

The biggest exception so far has been in Maryland, where legislators have passed legislation creating a first-in-the-nation digital advertising tax that Gov. Larry Hogan (R) is expected to veto but which the legislature may be able to override. In Kentucky, instead of attempting to pass the usual two-year budget using highly uncertain revenue projections, legislators have sent Gov. Andy Beshear (D) a one-year budget. While the budget has been slimmed down and does not include many spending increases that were initially planned, it does attempt to raise $25 million over the next two years by imposing punitive excise taxes on vapor products.

Tax Filing and Payment Extensions

When the federal government delayed this year’s income tax filing and payment deadline to July 15, most states quickly followed suit. Along with income tax extensions, many governors issued executive orders delaying other tax filing and payment deadlines, including sales and excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. deadlines, to provide a buffer for the many businesses that are facing a liquidity crisis and have been forced to furlough or lay off their employees. Delayed income, sales, and excise tax payment and filing deadlines have freed up critical cash flow to help businesses continue to make payroll as much as possible, but plummeting tax collections and delayed payment deadlines have also contributed to the unanticipated revenue shortfalls many states face just as they prepare to close the books on FY 2020 and finalize budgets for FY 2021. States are exploring a variety of ways to close those gaps, including through spending reductions, the use of reserve funds, or accounting adjustments.

In most states, property taxes are almost exclusively a local, not a state, revenue source, and because local governments rely heavily on property taxes as their primary source of own-source revenue, many localities are leaving existing property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. deadlines in place. Unlike income taxes, which are collected incrementally through payroll deductions and estimated tax payments, property taxes are usually paid in a lump sum or a few installments. Without receiving timely property tax collections, many localities would not have the revenue to continue funding basic essential services, including trash and utilities, emergency medical and law enforcement, and schools.

While local governments establish property tax rates and collect the revenue, deadlines are often set at the state level. The governors of Florida and Iowa have offered varying levels of relief for late payments, while New Hampshire has explicitly given local governments permission to offer abatements for late property tax payments. In most states, however, emergency property tax adjustments have come in the form of states extending the deadline by which taxpayers can file for homestead credits and related forms of relief.

States Turning Toward Longer-Term Fiscal Considerations

Most states used the month of March to authorize emergency funds, relax unemployment benefits waiting periods and eligibility requirements, and extend various tax deadlines. Now, as we approach mid-April, many policymakers have turned their attention to their state’s medium-to-longer-term policy considerations. Several states, including Utah and Wisconsin, are beginning to formulate plans to convene special sessions this spring. Utah legislators plan to authorize revenue transfers to avoid ending FY 2020 with a budget deficit, and Wisconsin legislators may yet consider COVID-19 response legislation, as well as unrelated bills that have been put on hold due to the pandemic.

Some states, after suspending their legislative sessions briefly in March, have resumed meeting in April, but with social distancing and personal protection measures in place. Many states that authorized remote voting options in March have begun to employ them in order to carry on with legislative business. At the same time, this past week several additional states, including Arizona, California, Iowa, and Mississippi, have further postponed their next legislative meeting day, with all but California pushing up against forthcoming April or May adjournment dates.

Many state economists are working to revise their revenue forecasts to support lawmakers’ budgeting efforts, but with so many factors that remain unknown, revenue forecasts will have higher decrees of uncertainty than perhaps ever. On April 9, Arizona’s Joint Legislative Budget Committee projected a $1.1 billion revenue shortfall for the state in FY 2021, but forecasters acknowledged the margin of error could be as much as $500 million in either direction. Similar uncertainty exists across the country.

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