Report: Pandemic Hit to Sales Tax Revenue Threatening Fiscal Health of Local Governments

ALBANY—Municipalities in New York State collected nearly $17 billion in sales tax revenue in 2019, representing 9.7% of all local government revenue, according to a comprehensive report on local sales tax released on Oct. 6 by New York State Comptroller DiNapoli. Every county and city in the state, along with many towns and villages, depend on these funds to pay for essential services and operations, thus revealing the statewide and local impact of the sales tax revenue losses from the pandemic.

“COVID-19 has decimated local sales tax revenue this year, blowing holes in the budgets of municipalities across New York State,” DiNapoli said. “As we work to rebuild our economy, we must also help repair the damage that has already been inflicted. Just as our Main Street small businesses can’t rebuild alone, our local governments don’t have the means to do this themselves. Direct aid from the federal government is needed to help our communities recover.”

Counties and cities outside New York City were the most dependent classes of local government on sales tax revenue, at 28.7% and 18.9% of total revenue, respectively. In 2019, New York City collected nearly $8 billion or 47.4% of all local sales tax revenue, although it only made up 8.7% of total city revenue.

Excluding the amounts they share with other local governments, counties received $6.7 billion, or 40%, of all local sales tax revenue in 2019. Over the past two decades, counties have become increasingly reliant on sales tax revenue, as it has grown at a faster average annual rate (3.5%) than all other revenue sources combined (1.8%) from 1999 to 2019. This has heightened counties’ fiscal risk since sales tax can be a volatile source of funds during uncertain economic times.

DiNapoli’s report found that 46 of the 57 counties shared nearly $2 billion in sales tax revenue with other local governments within their borders in 2019, with significant variations in how much they share and how it is allocated between cities, towns and other local entities. Thirteen counties shared more than 40% of their sales taxes, including Monroe (63%), Jefferson (53%), and Cayuga (49%). Conversely, seven counties shared less than 10%. The 36 counties with cities within their borders shared an average of 30% of their sales tax revenue.

The state has increasingly been tapping local sales tax collections for various purposes. In the State Fiscal Year (SFY) 2019-20 Enacted Budget, $59 million was directed to be withheld annually from counties’ collections to make unrestricted aid payments to most towns and villages, permanently shifting this burden from the state for these State Aid and Incentives for Municipalities payments, also known as AIM payments. A portion of New York City’s sales tax revenue was directed to be withheld to fund a Central Business District Tolling Capital Lockbox for the Metropolitan Transportation Authority, at $127.5 million in SFY 2019-20 and $170 million in SFY 2020-21, increasing by 1% annually going forward.

The SFY 2020-21 Enacted Budget further reduced sales tax distributions to counties outside New York City by $50 million annually for the next two years, to be put in a state fund for financially distressed hospitals and nursing homes. New York City will have $200 million in sales tax distributions withheld each year for the next two years for the same purpose. In prior years, sales tax intercepts had been used in only a few places, and only to assist specific counties and cities with their own fiscal stability and debt security.

These state reductions have at least partially offset recent positive impacts on local sales tax revenue, including a 2018 U.S. Supreme Court ruling that allowed states to require online retailers to collect and remit sales tax regardless of whether they have a physical presence in the state, along with a provision in the SFY 2019-20 Enacted Budget that requires online marketplaces, such as eBay and Etsy, to collect and remit sales tax to New York on behalf of third-party sellers.