Will the Pandemic Affect Your Taxes and Services?

It may be hard to think about anything but the illness and trauma that COVID-19 is causing here and around the world right now. We have just experienced a “springtime” that was at best lost and at worst only a taste of what may be coming down the pike. Outside my front window the sun is shining, but even though everything may look serene, it’s really not. Intellectually, we all know that eventually this pandemic will end. But way before it does end, we are all going to be facing several issues, and among them is this: How will the pandemic affect our local taxes? Will there be a property tax increase?

As the pandemic continues, the economic effects are troubling. How will it affect your taxes and services? Will there be a property tax increase?

Taxing Times Are Ahead of Us

Around the world and here at home, cities, states, and local governments are looking to close the massive budget shortfalls created by the coronavirus pandemic. They all have spent tons of money helping fight this disease and even though there has been money doled out by national and federal government agencies, private companies and public donations, local and state governments are considering raising taxes on homes, cigarettes, alcohol, local businesses, and even global tech giants. Why? Because local economies have seen their budgets decimated because of this virus.

Saving Lives Must Be the Priority

We all know and agree that every dollar needed to help fight a pandemic like this is necessary and we are spending them despite the fact that we have run through budgets like no one could have ever imagined. Because of the pandemic, two things have happened when it comes to budgets and government money.

The increases in spending combined with the decrease in tax collection, the lifeblood of what runs government, has created a major problem.

There are now just the beginnings of many proposed and even in some cases adopted changes in taxes that reflect the growing desperation on the part of government leaders. And they are even considering more harmful and economically risky moves in the middle of a widespread health and economic crisis.

When governments start to implement tax increases, it’s never because they want to do it, it only happens when they have no alternatives.

Here at Home, What Is on the Table?

There is talk right now about a “generous” idea as senators say they are weighing up options for a second round of financial relief to millions of American citizens and businesses. This second round of checks is up for debate as part of a $3 trillion stimulus package and Congress will likely make a decision before August 8. That is the last day the Senate is set to meet before taking a month-long recess until September 8.

It’s not much of a problem for our Federal government to dole out money since they can simply order it printed and distributed even when they don’t have any to spend. It just devalues our money a little more than it was and can make us seem happier—although a little bit poorer in reality.

The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse. This would be, as the saying goes, “too much money chasing too few goods”.

Well, a pandemic and an economic shutdown create no economic growth as in the growth reported just last quarter of -5%. That’s below zero growth! Combine no growth with lower taxes collected for several reasons like a huge tax cut and no income to tax during the shutdown and you can easily see where this is going.

What Some Cities Are Already Doing

Cities in states such as Florida, Texas, and California are really struggling right now to control the resurgence of coronavirus cases in their cities. Philadelphia, PA, my birthplace, has increased fees on parking and raised wage taxes on workers who reside outside the city to help economics from the pandemic. Chicago Mayor, Lori Lightfoot, said this month she couldn’t rule out a property tax increase to cover her city’s $700 million budget shortfall. But that’s just the tip of this iceberg.

Many other states and municipalities have considered a wide array of prospective rate hikes in response to major drops in once-reliable sources of income and months of failed attempts to get Congress to authorize more federal aid.

In June, Nashville leaders increased property taxes by about 34%, a move meant to help pay down public education costs and one that quickly sparked a public outcry. I have a feeling this kind of tax increase is going to happen right here where I live.

New Jersey, after all, already has the highest real estate taxes in the nation. I know some people who currently are paying—wait for it—over $10,000 a year on a moderately sized home in this state, and it has been that way for a very long time.

In addition to the threat of a major tax increase, NJ already rescinded its real estate tax rebate system called the “Homestead Rebate” which for decades has provided tax relief for qualified homeowners of which I personally was one. That’s about $500 of tax relief I and others will not see this year and maybe never again. That was done strictly to save money to fight the coronavirus.

The Other Side of Tax Hikes Is Service Cuts

The pandemic has left many cities and states slashing spending on public programs. They’ve put a stop to upgrading roadways, water systems, and have even furloughed some of their own staff. Those deep cuts have contributed to a total of 1.5 million lost public-sector jobs since the start of the pandemic. We are now 17 weeks into this crisis and the money-saving measures have just begun.

Yes, property tax increases can help local governments offset the economic carnage caused by rampant unemployment and major slowdowns in shopping and tourism, but doing so is a risky proposition.

It could imperil the country’s economic recovery before it begins in earnest, economists say, leaving residents and businesses to foot a bill that they may not be able to afford. If you think you see many shuttered empty business around right now, it could and may get even worse!

In New York, more than 100 state assembly members and senators issued a joint public statement this month essentially calling on the state to tax higher-income earners to close the $17 billion budget deficit. I’m not sure anyone likes higher taxes but for sure, those with higher incomes really hate it. They are still celebrating the massive federal tax cuts from just two years ago and are not in the mood to give any of that back to local cities and states. They may not want to, but they may have to!

Some New York legislators have set their sights specifically on tech giants such as Amazon, Facebook, and Google. They may be able to afford increased taxes, but they also have the economic power to fight if off while the economic consequences of the novel coronavirus are starting to seep into city budgets.

The Impact of Reduced Consumer Spending on One Major U.S. City

Reduced spending at stores and restaurants equates to less sales tax revenue, which is one of the most significant ways cities fund their services. Things like libraries, street repairs, police officers, and garbage pick-up that you use.

In Phoenix, AZ, more than 30% of the city’s revenue comes from sales taxes related to retail sales, tourism, and entertainment. But Phoenix is expecting at least a $26 million deficit in the fiscal year that will begin July 1. In early March, before the full scope of the COVID-19 pandemic was evident, the city was projecting a $28 million surplus in its $1.47 billion budget.

The $26 million deficit is likely an optimistic estimate of COVID-19’s impact on Phoenix’s budget. The number was calculated assuming the full impact of the pandemic only lasts until July, Deputy City Manager Jeff Barton told the City Council.

If it lasts until October, Phoenix would face a $56 million deficit. If it continues through December, the impact would grow to $79 million. And if it lasts until June of next year, the deficit will top $100 million.

How Are They Attempting to Fix It?

For right now, the Phoenix City Council is considering a budget assuming the $26 million deficit, knowing that it could have to cut even more later on. The Phoenix City Manager has now frozen all non-essential city spending and instituted a hiring freeze anticipating the looming revenue shortfall back in March. That directive is expected to save about $13 million, which will help limit the blow of the budget cuts.

But in addition to this, the city has also proposed the following ways to save their money:

  • Using all unallocated monies from the budget towards coronavirus issues ($6.8 million)
  • Eliminating a planned $4 million transfer to the city’s rainy-day fund
  • Deferring a $1 million planned payment to the city’s public safety pension stabilization fund
  • Eliminating city vehicle replacement ($2.2 million)

The Phoenix council has options if it needs to make more cuts in the coming months.

What Phoenix—and the Rest of Us—Should Do Right Now

It’s simple. Brace and plan for the worst economically. Be a smart saver and shopper and build up your emergency fund as soon as you can. Live below you means, at least until you know for sure your health and your wallet are safe. You don’t know that yet, so now is the time to start bracing!

Final Thoughts

It might be difficult to look any further ahead than one day when it comes to COVID-19. But there will be many repercussions from it long after the spread has slowed and the pandemic recedes. Those aftershocks will hit and continue to hit all of us in the pocketbook and I am afraid it is unstoppable.

What are you most afraid of about our economic future right now? Are you prepared for inflation, tax increases, public service cutbacks, and a different kind of work life or retirement life than you thought it would be? Are you optimistic or pessimistic about our future?

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