Most states have managed to get through the COVID-19 pandemic without increasing taxes, despite predictions last year, according to a new report.
For the report the Urban-Brookings Tax Policy Center and tax software provider Avalara surveyed officials from 44 states about their 2020 fiscal year and projections for the future to measure how states fared and what they’re planning. The
While most states remain flush with cash thanks to tax revenues and the federal stimulus dollars that finally started flowing this year, it’s unlikely they will hold steady on changes to their tax rules. Moving forward, the researchers expect to see a shift toward equity-based tax changes as authorities look to keep pace with shifts in consumer behavior.
Among those shifts in consumer behavior seen by state tax officials was people relying more on grocery delivery services to safely shop for food and other essential items. “It was pretty easy for them to look at the restaurant industry in their state and appreciate the fact that no one is going to restaurants,” said Scott Peterson, vice president of U.S. tax policy at Avalara. “For the grocery stores, they would presume that the majority of people were going to the grocery store in some fashion or another, but in the grocery industry every grocery store that had any capacity whatsoever to change created alternative ways of delivering. They all went to the internet. They all went to delivery services. They all hired people who would come in and do the shopping for you and then meet you at the back door with your packages. Most of those things, from a sales tax perspective, are all going to have the same rate. Therefore the taxability isn’t going to change.”
Consumers have been relying more on delivery services such as DoorDash and gig worker services like TaskRabbit, he noted. “That stuff is not subject to sales tax in most states,” said Peterson. “The price of groceries didn’t go down to offset the cost of delivery.”
One place where consumption seemed to rise during the pandemic was alcohol. “The one area where it did go up was in sales of alcohol,” said Peterosn. “Some of that was driven by the states. One of the tax policy changes that happened in 2020 that I don’t think any of us anticipated was states loosening up the laws around the sale of alcohol so that restaurants could continue to sell alcohol when they were doing takeout meals. If you were a restaurateur, you could keep your chef busy, and you could probably keep some of your serving staff busy by doing takeout meals. But if no one can come in, and you can’t sell alcohol, you’ve got to lay off the entire bartending staff. A lot of states picked up on that right away. They were able to keep people employed, which saves unemployment insurance funds, and keep people paying taxes.”
Cannabis consumption also rose thanks to the increasing legalization of marijuana in states around the country. “To the extent people passed laws allowing the sales of cannabis, there was an increase in tax collections resulting from that,” said Peterson. “But those things were occurring before the pandemic so they weren’t pandemic driven. They were really more just about changing how we view the sale of cannabis and taxing the hell out of it.”
Another big impact came from the Supreme Court’s 2018 decision in the case of South Dakota v. Wayfair, which made it easier for states to charge taxes on internet sales from out-of-state e-commerce merchants. State tax officials who responded to the survey saw that as a matter of tax equity.
“The pandemic’s effects on their tax collections weren’t as bad as they thought they were going to be a year ago,” said Peterson. “Often it’s either political ideology or recessions that drive tax policy. Where we did see people’s comments on tax policy changes were more what we think of as equity driven tax policy changes. For instance, the Wayfair decision in 2018. The states felt that the Supreme Court’s decision created equity inside their taxpayer community. Before Wayfair, some people selling into the states were collecting sales tax and some people weren’t. After Wayfair, everybody had the same obligation for tax, so from that perspective, this was an equity decision. It created equity inside the taxpayer community for making sales inside the states.”
