The Pandemic's Impact on County Sales Tax

By Dave Lucas, NYSAC Director of Finance and Intergovernmental Affairs

During the strictest lockdown period of the COVID-19 pandemic, every corner of the state saw dramatic declines in activity, but as things reopened, that activity picked up quickly in some parts.

of the state while others lagged. By the end of 2020 just over half of the counties saw their sales tax collections recover to prior year levels. However, for counties that did not recover, all but one was still behind at the end of February 2021.

New York City and the neighboring metropolitan counties were the first to feel the impact of the pandemic. Density issues in downstate regions delayed their reopening and resulted in a slower restoration of economic activity. As regions of the state reopened the impact on taxable sales activity became evident.

Mapping the Sales Tax Recovery

Table 1 highlights State of New York data for taxable sales activity for a full year under the COVID pandemic (the state taxes goods and services differently than most counties and this results in a different variety of industries contributing to sales tax than for most counties). This period represents March 1, 2020, through February 28, 2021. Total taxable sales were down by $44 billion, or 12 percent.

Nearly $27 billion, 60 percent of the shortfall, occurred in the hard-hit Restaurants and Traveler Accommodation sectors, respectively, hotels & restaurants. Businesses deemed essential (big box, grocery and warehouse stores) and internet-based retail experienced stronger growth to help offset some of the losses.

The statewide impact on taxable sales is swayed by New York City. The City is reliant on its commuter workforce and tourism for a significant portion of its taxable sales. Restrictions on travel and social density shut down tourism and largely eliminated foot traffic across the city. Fewer tourists and “work from home” extended the economic pain to retailers and service providers of all kinds.

As the epicenter of the pandemic, New York City experienced the sharpest declines in taxable sales and has had the slowest recovery of any region of the state. Total taxable sales were down by $43.2 billion, nearly 24 percent. For the counties outside of the City the decline in taxable sales activity was much smaller, but it varied widely by county. Taxable sales were down $5.8 billion, or -2.6 percent. The losses were concentrated in travel accommodation, department and clothing stores, gasoline stations and restaurants.

Federal Stimulus Helped Boost the Economy

A major contributor to the economic recovery was the enactment of Federal COVID stimulus funding. Especially critical were payments that supported individuals, businesses and state and local governments. Without federal support, the recession would have lasted longer and the damage to the economy would have been longer lasting.

From the beginning of the pandemic through March of 2021, Congress and two presidents authorized $5.2 trillion in fiscal stimulus to fight the pandemic and restore the economy. To put this funding into perspective, the entire federal budget in 2019 was about $4 trillion. In the 18 months following the start of the pandemic the federal stimulus increased the average monthly growth rate in personal income by 271 percent, rising from .4 percent to nearly 1.1 percent.

Taxable Sales Recovered Gradually

The easing of pandemic lockdowns in conjunction with federal stimulus enabled consumers to maintain their spending. The wide availability of vaccines provided comfort to consumers to wade back into more regular activities. As more time passed taxable sales improved, but the recovery varied considerably by county and region.

Pre-COVID, taxable sales per quarter averaged about $92 billion for New York State. During the first year of the pandemic, no quarter exceeded the prior year average. The deepest lockdown months of March through May of 2020 experienced the biggest declines. This pattern held true in most counties.

About half of the counties saw their sales tax activity fully recover by the end of 2020 even though certain sectors like tourism, hotel accommodation, restaurants, clothing stores and general retail continued to underperform. In aggregate, total taxable sales fell by $5.7 billion, -2.6 percent. The estimated sales tax loss was $234 million, but the impact was uneven with a range of -10.9 percent to +9.9 percent.

For New York City, the result was similar, but the downturn was deeper and lasted longer. The city vastly underperformed in sales activity in every quarter. As with counties, the same sectors were hit the hardest with travel accommodation down 90 percent ($8.5 billion), restaurants down 58 percent ($13.3 billion), clothing stores down 52 percent ($3 billion) and transit and ground transportation services down 50 percent ($1.6 billion).

The Results After One Year of COVID

Though taxable sales improved considerably across the state over the 12 months ending February 2021, the recovery has been uneven. While there is not a one-size-fits-all explanation why some counties performed better, those that lagged were usually more reliant on:

• tourism and hospitality,

• large commuter workforces,

• restaurants,

• college students at school (rather than remote),

• unique, or regional shopping destinations, and

• regional entertainment & attractions (stadiums, concert venues, amusement parks, etc).

Heading further into 2021, sales tax activity continues to improve but there are a lot of one-time factors contributing to the recovery that will eventually end: • high inflation - running at about 10 percent, more than four times higher than pre-pandemic levels;

• federal stimulus payments to individuals and business is being exhausted, including enhanced unemployment benefits which ended September 2021;

• supply chain disruptions are causing shortages, for high ticket items like automobiles and also general goods – this could dampen year-end holiday shopping and last well into 2022; and

• the sharp spike in internet-based retail growth that occurred during the pandemic is moving toward prepandemic trends.

Beyond taxable sales activity mentioned so far, we have sales tax cash results through September 2021. Collections continue to improve and the pace is expected to remain healthy through the end of the year with some exceptions as noted. NYSAC is estimating that total sales tax collections through September for the counties outside of New York City are about $7.5 billion. This is significantly higher than the same period in 2020 as COVID shutdowns deeply impacted results. The collections for 2021 are also significantly higher than they were for the same period in 2019 on a nominal basis, up nearly 18 percent.

As described, one-time factors are heavily influencing sales tax results in 2021. High inflation and state law changes related to internet-based retail can explain more than half of the strong growth over 2019 results. Counties will have to be cautious as they move forward in estimating sales tax revenues for their 2022 budget and beyond as the one-time factors that buoyed retail activity are gradually removed.

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