There is no realistic scenario in which government units in Indiana come out of the COVID-19 pandemic unscathed, says a new report from Ball State University.
“COVID-19 Effects on Indiana’s State and Local Taxes,” an analysis by Ball State’s Center for Business and Economic Research, finds that the economic shutdown caused by COVID-19 has deeply damaged the state’s economy.
The study estimates state and local governments are now facing tax revenue losses for all local governments that range from $240 million to $700 million in 2020. CBER anticipates tax revenues will rebound by the end of 2021 but remain beneath the 2019 levels by as little as $39 million and as much as $559 million.
“Our scenarios reflect a state that will not fully recover from this pandemic before 2022, if not much longer,” said Michael Hicks, CBER director who conducted the study with Dagney Faulk, CBER research director, and Srikant Devaraj, a CBER research professor. “These estimates are for a deep and lengthy downturn, and each of our scenarios are among the seven worst since the start of the Great Depression.”
CBER estimates decreases in tax revenues to state and local government for five familiar economic scenarios resulting from the pandemic in 2020 and 2021: a V-shaped recession (downturn followed by a quick and lasting recovery), a V-shaped recession with hangover (quick down, quick upturn followed by slow growth), Nike swoosh (gradual, but still aggressive recovery), roller coaster (up and down economic growth), and L-shaped recession (fast downturn followed by long, brutally-slow recovery).
For each scenario, CBER estimated the impact on Indiana state sales tax, personal and corporate income tax, and other tax revenue with reasonable assumptions. For calendar year 2020, researchers expect tax losses to range from 3.8% to 10.9% of 2019 total revenues for the state. In 2021, the study anticipates tax revenues will still range from 0.7% to 9.4% beneath those of 2019.
“While we generally anticipate improved economic conditions in 2021, our most optimistic scenario places GDP at only 2% above that of 2019,” Hicks said. “Our most pessimistic scenario considers GDP in 2021 at 2% beneath the 2019 level. “
Compared to the state, county-level tax losses comprise a smaller share of total revenues, ranging from losses of 2.4% to 6.8% across the five scenarios in 2020 and between 0.4% to 5.8% losses in 2021. In 2020, the report anticipates county-level revenue losses to range from less than 1% of total tax revenue to more than 48%.
Hicks said the wide variation in anticipated tax losses for local governments can be attributed to variations in local economic structures, with a higher share of employment in the most “at-risk” sectors of recreation, eating and drinking establishments, and accommodations.
Variation in tax revenue losses can also be attributed to variation in the local share of non-property tax revenues, which is a local decision, he said.
Faulk said the goal of this study is to help state and local policymakers better understand the fiscal impacts of the ongoing global COVID-19 pandemic and aid with budget planning considerations.
“We also hope that our work will help federal policymakers understand the risks of diminished public services to state and local economies,” she said.