Topics: Miller College of Business, Research

April 13, 2020

Local government tax revenues for 2020 were expected to be stagnant even before COVID-19 forced a shutdown of the economy to mitigate the impact of the disease. The closure might cost more than $200 million in an optimistic scenario, says a new report from Ball State University.

Preliminary Fiscal Effects of COVID-19 on Indiana’s Local Tax Revenues,” a report by Ball State’s Center for Business and Economic Research (CBER), offers estimates of the potential COVID-19 impacts on local budgets under two scenarios. The report breaks tax losses on a county-by-county basis.

“We have been observing and participating in economic estimates of the impact of COVID-19 since January,” said CBER director Michael Hicks. “The only consistent observation over this period is that every projection has worsened following later analysis.

“Our first scenario is especially rosy, suggesting a return to normalcy and baseline economic conditions in the second half of 2020,” he said. “Scenario 2 is more likely, suggesting continued economic performance well below baseline through 2020. Indeed, this forecast is for a three-quarter recession that is greater than any in the post-war period. This too might be optimistic.”

In both scenarios, local income taxes drop significantly. In Scenario 1, the study projects a loss of roughly $218.4 million in total local option income taxes. In the second, the loss in local income taxes could be $315.4 million. Local governments across the state derive 87% of their revenues from property taxes, local income taxes, state aid to schools, and state aid for roads.

Scenario 1 is the relatively mild disruption resulting from a -17.2% annualized GDP decline in one month of first and second quarters, followed by a return to 2019 levels of economic activity in the second half of the year.

For all other taxes (food and beverage, innkeeper’s, and gaming) the scenario assumes a 90% reduction for the four-month period, followed by a return to baseline in the second half of 2020.

Scenario 2 is a deeper downturn, which combines the first and second quarter declines from Scenario 1 with a continued lower level of economic activity through the remainder of 2020, with GDP averaging 4% lower than baseline for each of the last two quarters of the year.

For all other taxes (food and beverage, Innkeeper’s, and gaming), researchers assume a 90% reduction for the four-month period, and a return to 60% of baseline for the second half of 2020.

Hicks notes there are some limitations to the report.

“This forecast does not deal with property taxes, which should statutorily be unaffected in the short run,” he said. “However, the ability of taxing bodies to collect expected revenues from property taxpayers is questionable, given the reductions in the level of economic activity over the coming weeks.

“The impact of the recently passed federal aid programs is also not included in this analysis. These programs may mitigate the negative effects of COVID-19 on local revenue. We believe the currently constructed aid is unlikely to significantly affect local revenue.”

He also noted the report is an analysis of revenues, not of expenditures. Some costs, such as student transportation or public safety may be lower in 2020 than in 2019, while other expenditures may be significantly higher.

“These estimates are a good faith effort to prepare local and state policymakers with a description of the potential revenue conditions likely to surround the state in the coming weeks,” Hicks said. “We will update these estimates as more information becomes available.”