The pandemic relief bill recently signed by the President contains about $350 billion for state and local governments to make up for tax revenue that was lost due to the economic shutdown of the past year. This money is being allocated by a fairly strict formula based on population, and is not targeted at the areas most impacted (e.g. places with large tourist industries that have been shut down).
For state government and local jurisdictions across Washington, this adds up to a veritable flood of new revenue. Washington State government gets a total of $4.3 billion. King County government will receive about $437 million, and cities in King County will receive a total of $501 million. In almost every case, the inflow of federal dollars far exceeds COVID-related revenue declines.
To get a clear understanding of the scope of this windfall, let’s first look at the damage that needs to be repaired. We now have the full year data for 2020 on total sales tax receipts by local governments. This is the tax charged not just on retail, but on construction and services. Figure 1 shows the difference between sales tax collected in 2019 and 2020, adjusted for inflation for cities in King County. The cities shown collect more than $2 million per year in sales tax. The 14 cities below that threshold are grouped in “other cities.”
Countywide (including unincorporated areas) sales tax collections were down about 9 percent. But quite a number of cities had either very small losses or actual gains. Cities like Issaquah and Covington, with strong presence of big box stores, did well, and cities with strong homebuilding activity also did well. The biggest losers were, not surprisingly, near SeaTac Airport, where activity was very weak all year. Seattle, with its large visitor and entertainment industries, was hit hard.
The pain of sales tax losses will vary quite a bit, depending on how much of the local budget depends on that tax source. Taxable activity is not spread evenly around the region. Figure 2 shows per capita sales tax collections for 2019 for these cities.
In 2019, Tukwila collected 10 times as much sales tax, per capita, as Sammamish. After losing 40 percent of its sales tax revenue in 2020, SeaTac still had more sales tax revenue per capita than the average city did in 2019.
Figure 3 puts figures 1 and 2 together to show the per capita loss or gain in sales tax revenue between 2019 and 2020, adjusted for inflation.
Again, the picture of loss and gain is very uneven, with those jurisdictions that have staked their budgets on high sales tax collections taking the largest per capita hits.
Now, on to the federal assistance. The House Committee on Oversight and Reform provided estimates of the allocations of federal assistance to states, counties and cities. As mentioned above, Washington state gets $7.1 billion, King County government $437 million, and cities in King County will receive just over $500 million.
Figures 4 and 5 compare sales tax losses for 2020 with projected allocations of federal assistance, in order of the size of federal assistance. Seattle’s bars are not to scale.
Now, this is not an entirely fair picture, since cities have experienced losses in other revenue categories, such as business, parking and utility taxes. In some larger cities those additional losses are quite substantial. But overall those losses will be smaller than sales tax losses. In the first three quarters of 2020, statewide business and occupation taxes were down only 7.4 percent from the first three quarters of 2019. Property tax revenue, the largest source for most local governments, will be little affected by the pandemic. So if cities had a tax revenue problem in 2020, in most cases it would have been largely a sales tax problem.
That means that, for all but a handful of cities, this assistance will be a major windfall.
Looking Ahead
With the exception of Tukwila and SeaTac, all cities in King County should have money left over from their federal allocation after backfilling for lost tax revenue. In some cases, a lot more money. And that money comes with very few strings attached. How this money is spent, and the degree to which it creates bow waves and future expectations, will test the skill of state, regional, and local governments.
As a Seattle downtown resident I would sure like to see a good share of this excess income applied to our horrible homeless problem that blights much of downtown and many of our parks. I realize homelessness (like poverty in general) is a complex problem with no easy fix. However I would like to think that intelligence + wisdom combined with unanticipated revenue could make a serious longterm dent in this huge problem.
I worry about who will make these decisions about spending the federal windfall. Lobbyists for the major insterests will have an advantage, absent a plan and absent real transparency and absent major media coverage. It would be good if the governor and mayors of major cities would set up panels to weigh interests and report their choices, but I suspect most of the wrangling will be backstage. Gov. Inslee should lead the process, but instead most of the allocation decisions will be decided by the House and Senate Democratic caucuses. This is not a good way to run a railroad.
One intriguing idea would be for Democrats to deal with the regressive nature of our state’s tax system by taking the federal windfall money and then reducing one of the regressive taxes such as sales tax by a significant amount. The suggestion comes from DJ Wilson of Washington State Wire. https://washingtonstatewire.com/democrats-have-a-messaging-problem-on-capital-gains-here-is-how-they-can-fix-it/