Examining the Fiscal Impact of COVID-19 for Cities

December 14, 2020

By Laura Wheeler, Associate Director of the Center for State and Local Finance

The importance of a well-functioning city has never been more evident than in the past eight months. The impact of the pandemic and the ensuing economic hardship has shown how vital it is for our municipal governments to have the resources necessary to provide the services that their residents rely on and require.

In the spring, businesses closed, and residents were asked to significantly limit their presence outside the home to stem the tide of the pandemic. As a result, the revenue outlook for our cities looked bleak. Since then, many businesses have reopened, albeit at reduced capacity in most cases, and consumers have adapted their behavior. Consequently, municipal revenues have held up better than initially expected, but significant challenges remain.

So far, sales tax receipts have shown remarkable resilience. This is due in part to the passage of HB 276, which cleared the way for the collection of sales taxes on online purchases from vendors such as Wayfair and Etsy. In addition, local governments collect sales tax on grocery store purchases which have experienced a huge uptick—think more cooking at home and less dining out. Equally important, sales tax receipts were buoyed by the $1,200 stimulus checks and the $600 per week supplement in unemployment benefits. These additional funds allowed many consumers to keep their consumption up even when they were not working. Finally, consumers altered their consumption patterns away from services and towards goods which are more likely to be captured in the sales tax base—think more exercise bikes and fewer gym memberships. In place of expenditures on sporting events and travel, consumers engaged in home improvement projects.

Usually, property tax revenue is the largest single source of municipal revenue and prospects for this revenue source are mixed. Home sales have been performing very well as individuals are placing a higher value on space and mortgage rates are at historic lows.

But property tax revenues have a significant lag effect built into them. Property tax bills for 2020 are just now coming due. Given that the job losses so far have been concentrated among the lower-wage employees and home ownership is concentrated among higher-wage workers, there may be a muted impact on property tax receipts in terms of delinquent payments. Conversely, commercial property values are at a greater risk of decline. With more office workers working remotely—a trend that is likely to continue to some extent in the post-pandemic world—commercial property values may fall, and bankruptcies continue, both an ominous sign for property tax revenues.

By far, the hardest hit revenue source is the accommodation tax. This revenue has been decimated by all accounts and will not return until the public regains its confidence in travel. Alcoholic beverage taxes are likely to have returned somewhat but not to their pre-pandemic levels due to reduced seating capacity in restaurants. Franchise fees are likely down as a result of shuttered office buildings, and occupational tax revenue may see a drop next year as businesses close or owe less in tax due to reduced operations. Several cities also suspended water shutoffs during the height of the lockdown period in the spring. Although many have lifted these moratoriums, it is not clear that all back payments will be retrieved. This will put pressure on cities to support these enterprise funds so that their debt is properly funded.

As we enter the winter, COVID-19 cases are expected to increase, and consumers will likely react by curtailing their economic activity. There is little cities can do in the short run to adjust their sources of revenue, which is why federal support is so crucial. As part of the system of government, the federal government’s role is to act as a counterbalance for state and local governments during times of economic crisis. Thus, when economic activity is low and revenues are falling short, the federal government should provide the financial support that allows local governments to continue to offer much-needed services to their residents. At the same time, local governments should explore ways to provide services more efficiently, such as through shared service agreements and integrating technology into their operations.

The pandemic will eventually end, but it will leave lasting effects. Downtowns and office parks are likely to see fewer workers, city employees may continue to work remotely, large entertainment events will be smaller and traffic citations will be reduced. At the same time, there will be increased pressure for cities to provide more green space, social services and perhaps internet connectivity.

After the pandemic passes, cities will still face challenges stemming from climate change, racial and income inequality, an aging population and many more. Ensuring our cities are financially sound will always be an important task and a work in progress.

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