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City Budgets Taking Historic Sales Tax Hit, NLC Data Shows

The pandemic has led to the steepest yearly decline in sales tax revenue in at least 24 years, according to a just-released report. And the National League of Cities expects recovery to be slow.

As government faces an ominous financial future, it is already dealing with what is likely the sharpest drop in sales tax revenue in at least 24 years, according to new estimates from the National League of Cities.

According to a new NLC report that surveyed city finance officers and pulled data directly from budgets, sales tax revenue has dropped about 11 percent in 2020, along with a drop of more than 3 percent in income tax. Property tax grew about 2 percent, but on a call introducing the data experts pointed out that property tax trends typically lag other indicators.

Though IT leaders in state and local government have said their services have been in greater demand, and they could help their jurisdictions get through the recession with budgetary resources, the financial situation looks dire. The refrain from experts and leaders on the NLC call was that the nation’s economic recovery — to which government finances are inextricably tied — will be gradual, not fast.

“If the Great Recession provides a lesson, it is that it takes years for cities to recover lost revenue,” said Michael Pagano, director of the Government Finance Research Center at the University of Illinois at Chicago.

Much of the ability of government to operate during the pandemic is due to its IT shops, which have enabled telework, expanded Internet access to help schools set up distance learning, stood up call centers to help residents, hooked up medical sites with technology, moved in-person services online and more.

But who can tell whether they’ll be able to escape the budgetary axe suspended on a fraying rope? Many governments are currently working on future budget plans.

Mark Zandi, chief economist at Moody’s Analytics, said on the call that the current recession is unique and historic.

“You can see the recession, it was short — two months, March (and) April. It would be the shortest in history,” Zandi said. “The typical recession since World War II is about nine months. The financial crisis a little over a decade ago, that was 18 months, just for context. But it will be the most severe downturn in economic history … peak to trough, [gross domestic product], by my estimate, will be down about 14 percent. Again for a bit of contest, in the financial crisis, that very severe downturn, GDP fell peak to trough by 4 percent.”

However, in the months since those two months of rapid decline, recovery has been gradual, and economic indicators such as employment and GDP are still significantly lower than in February. He expects the recovery to last years.

“By the end of 2021, I don’t think we’ll have fully recovered all of the economic output that we lost during the recession,” he said. “In fact, I don’t think the economy will get back to full employment, which is probably an unemployment rate that’s in the mid-fours, until late 2023 or 2024. So this is going to be a long road ahead for us. It’s not going to be a V-shaped recovery. It’s going to be difficult.”

Zandi noted that aid to state and local governments is one of the most effective economic stimulants the federal government can fund. But that Congress hasn’t been able to pass such aid since the CARES Act, and whether they are able to could have a big effect on what happens to government workforces and services.

“If federal lawmakers don’t get it together, provide no additional support to the economy, in my view the economy’s going back into recession, and part of that will be significantly more job loss in state and local government,” he said. “If you told me, you know, 12, 18 months from now that state and local government shed another one and a half to two million jobs, I would say that sounds about right.”

Ben Miller is the associate editor of data and business for Government Technology. His reporting experience includes breaking news, business, community features and technical subjects. He holds a Bachelor’s degree in journalism from the Reynolds School of Journalism at the University of Nevada, Reno, and lives in Sacramento, Calif.