Businesses must pay sales taxes relatively promptly, for example, so the contraction in activity has already showed up in those collections. But income tax payments arrive with a longer lag, which pushes some shortfalls into spring 2021. And while a fall in commercial real estate prices could affect property tax collections, that would play out over years.
“States and local governments are thinking of this as a multiyear problem,” said Tracy Gordon, a senior fellow at the Urban Institute. “It’s mainly because of the way tax systems work. Most are inherently backward-looking.”
Projections vary widely depending on the severity of the virus in a state; the composition of its economy; and its tax system. But most states are expecting revenue to fall in the fiscal year ending in 2021, with several projecting 10 percent to 20 percent declines, according to data compiled by the Urban Institute.
The federal government, which unlike states is free to run a fiscal deficit, could close some or all of that gap. Democrats widely support such an action. In the absence of that, weak revenue collection would mean states and localities would probably need to cut deeper, adding to the 1.3 million jobs they have already slashed since February. Those job losses would arrive just as public health restrictions are loosening and the economy is otherwise surging ahead.
At the same time, the industries that have benefited most from the pandemic could see a reversal of fortune. As Americans have halted spending on services like travel and sports attendance, they have redirected much of that spending toward physical goods, with particularly strong numbers evident for food meant to be consumed at home, home improvement goods and exercise equipment.
In the third quarter, Americans’ spending on goods was up 6.9 percent from a year earlier, while services spending was down 7.2 percent. If those patterns were to fully reverse to pre-pandemic levels, goods-producing industries would experience a pullback in 2021 equivalent to what the services industry experienced in 2020.
The good news is that even as those goods sectors have increased production, they knew that the surge in demand might be temporary and have avoided long-term investments.