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For instance, in California the sales tax forecast is expected to decline by 36% in the second quarter of 2020 with only a moderate regrowth in the following quarters.
In this article, we will take a closer look at sales tax forecasts for local and state economies and how they’re likely to affect local and state revenue and expenditure budgets.
Be sure to check out our Education section to learn more about municipal bonds.
The Great Recession of 2008, which lasted approximately 20 months, was primarily due to the housing bubble and subprime mortgage crisis. However, the current downturn isn’t due to a fundamental risk factor in the economy – hence, the current drop may not create prolonged damage to the economy, and once a vaccine is in sight and states start to open up, consumer confidence and unemployment numbers can make a rapid recovery. A slower economic downturn would lead to a slower and more prolonged recovery, and would hurt consumer confidence much worse and lead to a longer unemployment recovery period.
Another important element of the CARES act is the unemployment payment boost of $600 per week, on top of regular state unemployment payments, lasting for four months. The extra unemployment payments may come with unintended consequences. While state unemployment payments vary, the average in the United States is roughly $350 per week. When you add $600 to that, the total is large enough that many low- and moderate-income workers would have an incentive to remain on the unemployment rolls rather than accept job offers. This will create a hindrance in encouraging people to return to work and bring the overall unemployment numbers down.
Joel L. Naroff, for The Philadelphia Inquirer, explains his optimism with the reopening of the economy by stating that, “The standard view is that we will have a V-shaped recovery. We crashed and burned, but once the economy reopens, it will rebound sharply. Indeed, as the argument goes, given the trillions of dollars being poured into the economy, a massive rebound is likely.
“At least in the first couple of months, that could happen. Since enormous numbers of firms closed, their reopening will obviously create an initial surge in activity. Households will likely go on a spending binge, restocking their homes and satisfying pent-up demand for all sorts of things.”
Unfortunately, to keep growth going, everything must go right: the V-shaped recovery requires the pandemic to end fairly quickly and at about the same time across the country. An extended shutdown increases damage greatly and reduces business survival rates. An in-sync recovery is needed to create the momentum required for strong growth. Households will have to become exuberant almost immediately and businesses will have to rehire most of their laid-off workers, keep them on the payrolls, and start investing right away.
Want to know the potential impact of COVID-19 on local and state governments? Click here to know more.
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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.