State’s Intercept Of Local Sales Taxes Compounds County Fiscal Challenges

By Dave Lucas 
NYSAC Director of Finance & Intergovernmental Affairs  
 

As counties struggle with mounting, unbudgeted COVID-related costs, they are simultaneously losing revenue due to the reduced economic activity that has come with fighting the virus. This unprecedent forced shutdown of our national economy has resulted in the 57 counties outside of New York City losing more than $720 million from lower sales and hotel occupancy taxes, and lost gaming revenues. 

As if those two factors weren't enough to challenge a county budget, the state is leveling a 20% cut to counties as it scrambles to close its own $15 billion budget gap.  These cuts translate to a loss of $635 million in state reimbursement for programs the county already delivered and paid for.  

Combined, counties are staring down more than $1.3 billion in revenue losses. To put this in perspective, the entire county property tax levy for all 57 counties is about $5.5 billion. The lost revenue represents 24 percent of the current county levy.  

Why is the drop in sales tax revenue so significant? Counties use sales and hotel occupancy taxes to offset the need for higher property taxes and to pay for local quality of life services. The more they decline, the greater the fiscal pressure on counties to raise property taxes. The only thing keeping counties afloat right now is years of prudent budgeting that allowed them to save for a rainy day. This was aided by the fact that preparations for the 2021 Fiscal Year began nine months ago when the pandemic first hit. As the pandemic swept across the country and the economy was placed in a medically induced coma, counties immediately began cutting expenses. They eliminated staff and ended service contracts that could not be completed during a public health emergency and deferred or even scrapped capital expenses and shored up revenues where they could. Through the end of 2021, counties will have effectively cut their budgets for 22 straight months to stay afloat and prepare for the eventual recovery. 

These tough but fiscally prudent actions kept counties afloat during this historic public health and economic crisis. Yet despite this prudent fiscal stewardship, counties are bracing for further revenue cuts. 

The next fiscal gut punch for county taxpayers will come from new state policies that essentially confiscate local sales tax revenues and diverts it to the state to fill self-inflicted holes in the state's financial plan. During the last two state budgets, the Governor and State Legislature have diverted $500 million in local sales tax revenues to state-defined projects and programs. 

This budgetary sleight of hand has effectively raised the state sales tax from 4 percent to 4.1 percent while reducing the local sales tax for a typical county from 4 percent to 3.9 percent. If state lawmakers continue to take county sales tax revenue to pay for state mandates and to bail out their overspending, on top of the billions in county property tax dollars that are swallowed up each year by the State to pay for state mandated programs and services, counties will have even less control over how their local revenues are spent.  

The latest state sales tax diversion is $250 million, for two years, and is intended to help health facilities that are fiscally distressed and burdened by the pandemic. Counties strongly support their local health facilities and providers, but we question the need to divert local sales tax to provide this temporary aid on top of the dramatic revenue losses, state cost shifts and higher pandemic response costs already being absorbed by counties.  

Despite Congress's inability to provide aid to states and counties to replace lost revenues and higher costs from the pandemic, they have been vigilant in providing this aid to health facilities and providers to the tune of $175 billion so far nationwide.

This is exactly what Congress should do in the midst of a national emergency. With about 60 percent of the federally authorized funding distributed, New York health facilities and providers have already received about $11.5 billion in pandemic aid to help cover higher costs and lost revenues, and they will be receiving billions more. The most recent payments will make up for at least 87 percent of lost revenue at all hospitals and providers through the second quarter according to Senators Schumer and Gillibrand.

With health care facilities receiving significant federal help, and local governments left to fend for themselves, counties are asking state lawmakers to abandon this diversion of scarce sales tax dollars to hospitals who are receiving aid from the federal government, and let it remain with local governments who aren't receiving any such aid.  

Looking past the current crisis, this trend of the state shifting costs to local taxpayers and confiscating local revenues is disturbing and unsustainable, and it must be reversed if we expect our residents and businesses to stay and thrive in New York. We operate in a global budget environment in New York State. Each decision the state makes to refine a program, make it more efficient, or cut state agency costs allows it to use those savings elsewhere or to cut state income taxes.  

But when the state shifts costs to local governments, or takes local revenues to pay for state programs, they are simply transferring a new burden from the state taxpayer to the local taxpayer. It may look better on the state ledger, but New Yorkers are still paying, and they are getting fewer local services every time it happens.  

With great respect to our state leaders, and meaning no offense, what gives here?