Local governments in Texas are facing severe budget strains because of tax revenue losses from the coronavirus shutdowns, a problem exacerbated by the state’s method of allocating local sales taxes.
“The temporary closure of businesses and high levels of unemployment due to the pandemic have caused sales tax revenue—which make up a significant portion of cities’ budgets—to plummet” reports the Texas Tribune. “On Wednesday, Texas Comptroller Glenn Hegar announced that local sales tax allocations for cities in June dropped by 11.1% in comparison with the same month last year.”
Cities are using federal CARES Act money to plug the immediate holes, but local governments say it is not enough and are asking for more money from federal taxpayers.
‘“When you’re talking about Houston, $400 million sounds like a lot of money, it’s 15% of the general fund,’ Fulton said. ‘But if you can only spend that money on certain things and spend it in a short period of time, you’re probably not going to solve all your budget problems, and what do you do the next fiscal year?,” the Texas Tribune reports.
The U.S. House of Representatives has passed legislation authorizing $1 trillion for local governments across the nation, as part of a bill totaling $3 trillion, but U.S. Senate leaders have balked at the price tag and the possibility of bailing out governments for unnecessary spending.
Cities dependent on sales taxes have been hit particularly hard by the governments’ coronavirus shutdowns. With in-person shopping greatly suppressed by the shutdowns, the local sales tax revenues received from online shopping have been an important part of cities’ revenue streams.
That has resulted in a big shift in local sales tax revenues because of the way Texas distributes them.
“Sales taxes are collected by the state, which then distributes the local share of the money to the cities where the sales were made,” another story in the Texas Tribune reports. “But in the case of internet sales, those distributions don’t necessarily go to the buyer’s location. Round Rock gets the local Dell taxes from online sales even if the buyer is in Fort Stockton. San Marcos gets the Best Buy local taxes even if the buyer is in Corpus Christi.”
That happens because “the Texas cities those companies designate as the homes of their online stores reap the sales tax benefits—as if the stores themselves were based there,” the Tribune reports. “Best Buy, for instance, sources its internet sales to San Marcos.”
As a result, while April sales tax revenues were down by 11.1 percent year-over-year, the city of San Marcos received a 51 percent increase in sales tax money in that month.
“[A] number of Texas cities benefited from double-digit percentage sales tax increases in April or May, or both: San Marcos, Schertz, Victoria, Pflugerville, League City, McKinney, Lufkin, Carrollton and DeSoto,” the Texas Tribune reports. “On the other end of the spectrum, 44 Texas cities—including Houston, San Antonio, Dallas, Austin and Fort Worth—each saw double-digit percentage decreases in sales taxes.”
That means a few cities have been much better protected from the coronavirus sales tax effect than others, the Tribune notes.
Instead of hoping for bailouts, state and local governments can avoid the worst of these tax revenue volatility problems by carefully designing their tax structures to diversify revenue streams and rely more heavily on relatively reliable sources such as property taxes, writes Heritage Foundation Research Analyst Grezler in a report published last week.
“States that rely heavily on income taxes and excise taxes should shift their systems to rely on more stable and less economically damaging sales and property taxes,” Greszler writes.
In addition, the federal government could help by removing unfunded mandates, in which the government requires states to spend money they must generate themselves—such as the Davis-Bacon Act (1931), which significantly increases the construction costs of any project that receives federal money, Greszler says.
A straightforward mix of policies can prepare states to make it through hard times and prosper over the long haul, Greszler says.
“Rather than seek federal bailouts, states can address their near-term financial shortfalls by enacting sound economic policies that will also generate long-term benefits,” Greszler writes. “First, states should seek to safely re-open parts of society with an emphasis on medical care and child care. States should also implement more competitive and efficient governance through reform of public employee compensation and pension systems. Lastly, by taking steps to implement more pro-growth tax policies and more welcoming work environments, states can alleviate short-term revenue shortfalls and high unemployment levels, with the added benefit of creating more prosperous societies in the long term. Instead of providing bailouts, the federal government should help states to cope with revenue losses by relieving them of the burden of unfunded federal mandates.”