Coronavirus takes its toll on local US governments as layoffs, pay cuts loom

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States, cities brace for massive budget gaps from COVID-19

Cities funded with income, sales and other volatile tax sources are the most vulnerable; William La Jeunesse reports.

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While thousands fight for their lives, COVID-19's next victim may be closer to home. Cities, counties and states face layoffs, pay cuts and hiring freezes as sales, income, corporate and tourism taxes collapse.

“We’re going to pick up your trash.  Your lights, your water will be there," Los Angeles Mayor Eric Garcetti, a Democrat, said Wednesday. "But, make no mistake, there will be big cuts.”

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Los Angeles was hardly alone. Hard-hit cities have included Columbus, Cincinnati and Cleveland, cities getting over 67 percent of their general revenues from income taxes, according to a Brooking Institute study. Tulsa, Okla., Denver and Lincoln, Neb., have received over half their revenues from sales taxes, which are near zero.

Groceries in most places are not taxed. Budgets in other cities such as Birmingham, Ala., Lexington, Ky., Kansas City and Fayetteville, Ark., also have relied heavily on volatile taxes and single industries now shut down. Cities reliant on property taxes have faced less exposure.

"Property taxes are very stable compared to other forms of taxes, especially during a recession," the Tax Foundation's Director of State Tax Policy Jared Walczak said. "A lot of projects can be delayed. You might be able to push that into a later year, but there are some services you really can't do much about. You have to meet those needs."

More than 1,100 cities told the U.S. Conference of Mayors they needed scale back public services. Almost 600 predicted they will lay off workers, including fire and police.

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Tourism taxes also dried up. Florida, Arizona, New York and California were especially hard-hit. San Diego is projecting a $100 million loss, 75 percent from hotel taxes. Los Angeles has predicted a 70-percent decline in tourism taxes. San Francisco has been facing an $800 million shortfall. Today Mayor Bill de Blasio said New York City faced major budget cuts and a hiring freeze.

"We will lose $7.4 billion in taxes over the next two fiscal years," the Democrat said Thursday. "Sales taxes are way down because people aren't going out. They're not buying things. Income tax, obviously, way down, people have lost jobs, lost income."

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Counties and states have seen similar impacts. California State Association of Counties Executive Director Graham Knaus said the virus sparked an "unprecedented emergency."

"Tourism is almost gone right now," Walczak continued. "We can all hope that it comes back relatively soon, but for the time being, almost no one is traveling for pleasure and very few people are traveling for business. So, those taxes have almost zeroed out."

States faced layoffs and pay cuts during the 2001 and 2008 recession. California saw an especially severe impact because 50 percent of its income tax revenue is derived from the top 1 percent of taxpayers. Without their capital-gains taxes, and with massive stock market losses offsetting their income, the state has faced a shortfall of up to $50 billion, according to state finance officials who said this "downturn is unlike anything we've seen."

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"State and local governments need broad-based federal support to meet this moment," Gov. Gavin Newsom, D-Calif., said. "Without a substantial economic intervention from the federal government, many of these middle-class households may fall into poverty."

Of the most concern: unemployment benefits and health care. Medi-Cal, the state’s free health-care for its poorest residents, already has enrolled some 13 million Californians. The COVID-19 crisis could add as many as 1 million more. On Wednesday, Newsom announced plans to provide illegal immigrants $500 to $1,000 per family since they did not qualify for unemployment or a federal stimulus check.

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While each state has faced its own shortfall, Nevada is likely among the worst.

Sales and gambling taxes have accounted for over 46 percent of Nevada’s general fund income. When stay-at-home orders are lifted, many analysts said they didn't expect travelers to get back into airplanes, especially to casinos without social distancing.