The pandemic-induced economic shutdown and job loss will have significant immediate and future impacts to state and local revenues. Decline in revenue from the income tax side may end up not being as dire as initially projected due to the majority of job loss being more prevalent in low-wage workers, but from the sales tax perspective the long-range effects are starting to take shape. According to Louise Sheiner and Sophia Campbell from Brookings, “Sales taxes look to decline $49 billion this year, $45 billion next year, and $46 billion in 2022, in part reflecting lower price levels and in part because of changes in demand.”
Sales taxes account for roughly 25% of state and local tax revenue making the consistent year-over-year projected declines alarming at first glance. In reality, much of the lost sales tax revenue typically collected was due to what could be a temporary shift in consumer buying habits. Typical high-sales tax purchases such as vehicles, vacations, and other forms of entertainment are likely a delayed event as opposed to lost forever. As sales tax revenue moves proportionally with the consumption of taxed items, the true effects of lost sales tax on state and local revenue will flow in the same direction as the economy.
To read the full article from Brookings, click here.