How COVID-19 will affect states’ revenues, taxes and you

GettyImages-624511076The COVID-19 pandemic has had a tremendous impact on the country’s physical health and the economy, including a major impact on states and their revenue. 

According to a Center on Budget and Policy Priorities (CBPP) recent report, states, localities, tribal nations and U.S. territories face revenue shortfalls of about $480 billion and $620 billion through 2022. It could reach even higher if there is a double-dip recession. Affected state revenue sources include individual and corporate income taxes, sales taxes and gasoline taxes, as well as local property taxes.

Unlike the federal government, most states require a balanced budget each year. A recent presentation to the National Conference of State Legislatures Task Force on State and Local Taxation (NCSL SALT Task Force) notes that states have $90 billion in rainy day funds. The Federation of Tax Administrators (FTA) estimates that this is 10% of total state budgets.  

Some states have acted by:

  • extending tax filing and payment deadlines
  • modifying nexus requirements to avoid punishing telework
  • modifying and extending net operating loss provisions
  • modifying conformity/decoupling from the Coronavirus Aid, Relief, and Economic Security (CARES) Act

There haven’t been many major state tax increases. That’s likely to change if the federal government doesn’t provide enough state aid. 

Some states might consider a sales tax on professional services, such as accounting services. In 2020, such efforts in Montana and Wyoming failed, but Wyoming legislation is expected in 2021. The AICPA continues to work with state CPA societies on a state-by-state basis to oppose a sales tax on accounting services.

According to the Center on Budget and Policy Priorities (CBPP), state and local governments have furloughed or laid off 1.2 million workers, far more than the 750,000 who lost their jobs during the Great Recession. They’ve also imposed spending cuts on public services. Georgia, for example, cut K-12 funding by nearly $1 billion, and California cut higher education by roughly the same amount. If the federal government doesn’t provide more state aid, more state cuts await us — layoffs, tuition hikes and reduced public services.

While states and local governments have received a $246 billion federal stimulus to date, the AICPA believes that states need more federal aid, and we continue to advocate for that. The amount of additional state and local aid is under negotiation with the House Democrats’ Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, including $875 billion ($500 billion for states, $375 billion for local governments). If the states don’t receive the needed federal aid, they likely will slice budgets. 

During the pandemic, the AICPA has tracked state tax guidance and provided state CPA societies with recommendations on administrative, filing and payment relief for state and local taxes during the coronavirus pandemic. That resource included recommendations on e-signatures, one additional month state filing after federal filing, and state tax treatment of remote work. The AICPA developed a letter to advise clients on teleworking

The AICPA also submitted letters to Congress on the remote worker issue in June 2020, July 2020 and August 2020 with a coalition letter with 120 organizations, including 45 state CPA societies, urging the provision be included in the next Congressional pandemic relief effort. In addition, the AICPA testified in Congress on the Wayfair online sales tax issue with suggestions to simplify the rules. 

To learn more about the state tax revenue situation and what state tax policies and actions are possible, attend the December 8th AICPA/UNC Tax Center webcast “Tax Policy & Planning: How States Propose to Bridge COVID-19 Revenue Shortfall.”

Eileen Reichenberg Sherr, CPA, CGMA, MT, Director — AICPA Tax Policy and Advocacy