Thursday, April 2, 2020 by Chad Swiatecki

Forecasters size up city’s lost tax revenues from sales, hotels, alcohol due to Covid-19

Early analysis shows the city will lose $1 million per month in mixed beverage taxes while the local bar and restaurant industry is shut down, with a forthcoming economic model expected to give a picture of the loss in sales taxes. Because sales taxes make up the largest portion of the city’s General Fund, that decrease is expected to have a major impact on spending and the next budget cycle.

Ed Van Eenoo, the city’s deputy chief financial officer, told the Austin Monitor that last year the city reaped $14.2 million in mixed beverage revenues, which would translate to around $1 million a month being lost because of measures taken to slow the spread of Covid-19 locally.

Determining the drop in sales taxes will be difficult because there is still limited commercial activity taking place in person and online. With that category representing 23 percent of the General Fund, Van Eenoo said it is important to know the range of possible losses.

“We need to look at it as an annual budget and we have a certain amount of money that the Council has approved us to spend. That amount was based on certain assumptions with revenues, but what’s so tough is, we don’t know the duration of this; how long the lockdown is going to be in place and how fast life is going to get back to normal once the gathering restrictions are lifted,” he said. “It will be a well-informed educated guess as much as anything, since this is unlike anything we’ve ever seen in the past, like the tech bubble in the early 2000s and the credit market crisis in 2008 and 2009.”

Economist Jon Hockenyos, president of TXP Inc., is assembling forecasts for Austin and other major cities in Texas based on federal data on expected job losses in categories such as hospitality, retail, sales, technology, and oil and gas.

One possible source of additional revenue for the city will be an expected 8 percent increase in property tax rates that can be instituted because of the state’s emergency declaration. The city had been prepared for only a 3.5 percent property tax increase in the next budget because of a recently passed state law limiting annual increases, with the difference translating to an additional $24 million for the General Fund.

Van Eenoo said a recently announced hiring freeze that will likely extend into next year represents the best option to make up budget shortfalls due to lower tax revenue. He said individual department heads have also been instructed to make cuts to discretionary spending going forward.

“One of the things a city can do in very short order to restrain spending and quickly adjust to a situation like this is to institute a hiring freeze. You’re saying the positions that are currently vacant are going to stay vacant for the rest of the year, and new positions as there are retirements or people taking other jobs, those are going to stay vacant as well. That’s a quick way to realize some substantial savings in our budget between the employee costs as well as benefits and contributions to retirement plans.”

Hockenyos said the long-standing correlation between employment trends and sales tax revenue will form the basis of his forecast, with consumer-facing industries such as hospitality and lodging, sales jobs and retail getting hit the hardest.

“There’s an extremely high correlation between rates of job growth or decline and rates of sales tax revenue growth or decline. The correlation has been pretty strong over time and you can use expected patterns of job loss as a mechanism to start thinking about sales taxes. To do this, you really want to look at patterns by occupation,” he said.

“There are some occupations that, no matter what, like if you’re in food service or a waiter, you’re going to lose your job. Conversely if you’re a data analyst for a tech company and can work from home you probably won’t.”

Some less-clear factors include the duration of limits on gatherings and in-person interactions, as well as the possibility that increased state and federal unemployment benefits create a labor shortage when businesses are expected to return to normal in June or July.

Photo made available through a Creative Commons license.

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city budget: The city’s plan for expenditures based on income.

COVID-19

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