By Kennon Walthall, Avenu Senior Vice President
In almost no time at all, COVID-19 has transformed both society and the economy. A rapid shift to remote work and the emergence of more digital-first services, combined with new social distancing and safety protocols, have altered everything from our work patterns and office practices to our home lives and shopping schedules.
While many of these changes hold promise for the future, they come at a cost. This is especially true for state and local governments whose tax revenue has dramatically been impacted the pandemic, and many are facing a severe budget crunch. From March to August of last year, as the coronavirus pandemic first took hold, total tax revenue at the state level declined by 6.4%, and state governments were suddenly facing hundreds of billions in lost revenue across the board.
Better revenue management will have to be a top 2021 priority for state and local governments looking to thrive in the post-COVID era. That’s because COVID-19 hasn’t just hurt the budgeting bottom line by depressing tax revenues; COVID is changing how tax revenue comes in and where can it be found, with previously reliable tax revenue streams drying up, while others grow. To stay on top of their revenue streams, governments will need to adopt the data-transparent, cost-efficient and effective technology tools and practices that maximize tax compliance in the new COVID-19 tax landscape and ensure that no tax revenue source goes untapped.
Tax revenue has always been a huge part of our economy, with state and local tax revenue accounting for about 9% of our national GDP. But taxes come in all shapes and sizes, and not every tax contributes equally to total tax revenue across every municipality and all 50 states. That means a major disruptive event, like the coronavirus pandemic, can shift the way tax revenue comes in, creating a disparate economic impact and changing the way taxes ought to be collected.
Take sales tax, for example. In 2017, state and local governments took in about $389 billion in general sales tax revenue, amounting to about 12% of overall revenue. In 2020, COVID-19 reduced sale tax revenue by about $50 billion, mostly by reducing the emphasis on what and how much people bought from heavily-taxed goods and services like restaurants and hotels.
But that overall decline in revenue doesn’t tell the whole story, because the impact from COVID-19’s effect on sales tax revenue wasn’t felt equally across the country.
Only 46 states collect general sales tax, and of those 46 states, some rely on sales tax more heavily than others to balance their budgets. These differences in revenue management led to significantly different COVID-19 outcomes; new research has found that the more a state or local government relied on sales tax income, the higher its unemployment rate for government employees during the pandemic.
But at the same time that sales taxes have gone down, other tax revenues may start to go up. As more people leverage the freedom of remote work to relocate from urban to rural areas, property taxes in some municipalities will rise. And as more people order take-out and use online delivery services, these digital platforms like Uber and DoorDash present yet another lucrative tax revenue stream.
A similar story can be told about a plethora of different tax revenue streams. With stagnant business growth in 2020 and many offices retooling their employees for remote work, business licensing taxes and occupational taxes are likely to decrease. At the same, alcohol sales have increased dramatically and alcohol taxes have grown with them.
What we see across revenue streams, industries, municipalities, and states is a shifting tax landscape, where previously reliable revenue streams are drying up while others are widening and increasing. The key for governments will be their ability to comprehend this changing tax landscape and tap into it effectively by maximizing compliance.
There’s a lot that governments can do, but maximizing compliance will start with an internal audit. As tax revenue streams shift and change, governments need assurance they’re getting what is owed to them. But all too often, cumbersome paper processing, opaque data, and an over-reliance on manual work can hamstring a government’s capacity to get a clear overview of patterns of compliance or noncompliance, especially when tax realities are rapidly changing. A comprehensive, internal audit can ensure that doesn’t happen.
In the same vein, governments must prioritize adopting technology that streamlines tax collection and administration. An automated tax management system, for example, can make sure governments get their tax revenue quickly, easily, and with a minimum of human error. Many of these systems are cloud based and can be quickly and easily implemented for a jurisdiction. Meanwhile, citizens are expecting and often times demanding an easier and more convenient way to meet their obligations So, if governments don’t have the digital portals and online payment options that facilitate paying taxes, licensing fees, and fines, then a lot of revenue will potentially get lost in the confusion and upheaval.
These are just a few examples, but the list goes on. The main idea is that better administrative practices and new technology can help governments enhance tax compliance by making tax collection and payment easier and more efficient for both governments and citizens, while also rooting out noncompliance. By doing so, state and local governments can unlock their 2021 revenue streams and face the future of our changing economy and society with strength and success.
COVID-19 has upset business as usual for the American economy, and businesses have hemorrhaged jobs over the last year to compensate for COVID-19’s impact. But governments are among those that have been hardest hit by the pandemic. State and local governments lost close to 1,000,000 jobs in 2020. Governments need a way to reverse this trend and emerge stronger in 2021.
As Avenu’s CEO, Paul Colangelo, writes in his latest op-ed for Forbes, automation can empower state and local governments to meet the challenges of the pandemic head-on. With automation, governments can save jobs, streamline their workflow, unlock hidden revenue and regain lost efficiency.
But state and local governments will need to make sure their ready to automate their operations. A comprehensive data audit and updates to their IT infrastructure, as well as new employee training programs, may all be necessary to make an automation effort a success.
Find our more here.
The January California Legislative Update provides an overview of Gov. Newsom’s recently released budget proposal.
Governor Gavin Newsom introduced his $227 billion 2021-22 Budget Proposal on Friday with fairly positive news. Although California’s revenues have experienced a moderate slowdown, thus far it has impacted the State’s revenues far less than anticipated by the 2020-21 Budget Act. The difference in projections is the result of a less severe economic downturn than expected wage losses in
large part impacting low-wage earners, and a stronger stock market than projected.
The Budget Proposal contains $34 billion in Reserves and Surplus
● $15.6 billion in the Proposition 2 Budget Stabilization Account (Rainy Day Fund)
● $450 million in the Safety Net Reserve
● $3 billion in the Public School System Stabilization Account
● $2.9 billion in the State’s operating reserve
Our full analysis will provide your jurisdiction the information needed to plan for the year.
The coronavirus pandemic has decimated the revenue of state and local governments. Businesses are closing and citizens are spending less, generating deficits in tax income vital to many government budgets. In response, governments are firing employees and cutting key services just in order to get through the 2020 budgeting season.
But governments have access to an alternative. Paul Colangelo, CEO of Avenu, outlines this alternative in his most recent op-ed. Automated, data-driven and tech-enabled revenue management can rescue government budgets without requiring governments to eliminate employees and services or raise taxes. The key is leveraging new digital and automation technology to unlock revenue hidden behind opaque internal processes and poorly optimized government processes.
Read the full article in Forbes about the steps governments can take today to discover hidden revenue and weather the fiscal impact of the coronavirus crisis.
The October California Legislative Update provides a broad review of bills that were signed into law by Califonia’s Governor, Gavin Newsom.
Avenu Co-sponsored Pre-Paid Wireless Bill Signed by the Governor: On October 08, 2019, the Governor passed the Local Prepaid Mobile Telephony Services Collection Act.
Governor’s Office of Business and Economic Development: The Legislature’s budget approves a total of $100 million to support the California Infrastructure and Economic Development Bank’s loan guarantee program that provides financial assistance to small businesses.
Clean Cars by 2035: The executive order requires that all new cars and passenger trucks sold in California must be zeroemission vehicles by 2035.
Medicaid Fiscal Accountability Regulation: Medicaid Director Seema Verma announced that, concerns that have been raised and they will be removing the Medicaid Fiscal Accountability Regulation from the regulatory agenda.
Through his work at Avenu, CEO Paul Colangelo has seen his fair share of major crises and provided invaluable guidance to cities and organizations looking to stay strong during a disruptive event.
What is the first priority for government entities and organizations worried about a crisis?
Maintaining a steady revenue stream while ensuring your employees are prepared to work under unprecedented conditions is key. Large scale crises directly threaten existing revenue structures. At the same time, work efficiency is undermined by disruptions to the normal work patterns. For these reasons, a crisis can easily overwhelm a poorly prepared organization. The very first priority has to be putting a plan in place to unlock new revenue and keep employees efficient.
How should organizational leaders approach crisis preparation?
The core task of a leader during a crisis is communication. You have to communicate well, both internally or externally, in order to weather disruption and thrive under conditions of uncertainty and change. Good communication is simply indispensable; even the most robust organizations will fumble a major crisis if they neglect to communicate.
What do organizational leaders need to know in order to prepare the most effective crisis communications?
Every organization today thrives on good data, and so internal data collection and data analysis are crucial to building up the specific knowledge base you need to act intelligently and communicate effectively. Organizations must perform internal risk assessments to identify vulnerabilities, and they must study and understand their own inner workings. Many government entities, for example, are sitting on hidden revenue simply because they don’t have the data available to identify lost tax revenue streams or discover regulatory non-compliance. Being equipped to unlock that hidden revenue could be lifesaving in a crisis situation.
What tools can organizations use to better prepare?
Automation is an invaluable tool in any organization’s toolbox. Automated revenue management systems and automated data analysis can both eliminate costly human errors and provide more transparent data. At the same time, automated systems can free up human work hours for more valuable labor and allow organizations to direct employees towards essential tasks during a crisis. And automated systems are disruption proof; good automation can mean the difference between success and failure where flexibility and continuity are key.
What other resources should organizations consider in preparing for a crisis?
I think that partnerships are an often overlooked and unduly neglected aspect for crisis preparation. Many third-party vendors can provide additional services at scale that can help an organization overcome any internal weaknesses or vulnerabilities. Public-private partnerships, and even public partnerships between governments or districts, enable resource sharing and coordinated problem solving at a level that can be vital when revenue is tight and the crisis presents unprecedented challenges.
What is your final takeaway?
In my many years of experience, one thing in particular has impressed itself upon me: most cities and organizations simply aren’t prepared for a crisis, and once a crisis happens, it’s almost always too late to start preparing. Organizational leaders have a responsibility to act early. That will mean making investments in infrastructure and technology. There’s simply no substitute for doing so.
In his long career, Avenu president Louis Schiavone Jr. has weathered many crises, including several global ones, and helped thousands of customers weather their own.
Have you found this recent crisis to be more difficult than others in the past?
COVID-19 has been unlike anything our country has seen before. Many businesses, organizations and local governments were not prepared for the pandemic, the economic shutdowns, the loss of revenue and the rapid shift to remote work. Crises are usually unexpected, but they’re often short-term. The combination of the unexpected, the uncertainty and the long-term has made this recent one much more difficult for our clients.
What should be a company’s first communications priority during a crisis?
Reach out to your clients immediately. Never wait for the client to call you. Ask what their biggest challenge is and come prepared with solutions you can offer. Remind yourself to remain calm, clear and consistent in all of your communications.
Do you have any tips for leading these crisis calls with clients?
Keep the messages simple. Prepare a list of talking points before speaking with a customer. These should be simple and straightforward. Don’t add stress with complicated communications.
What is the best way to respond to a client with difficult demands or needs?
Always be true to your word, and don’t overpromise. Only promise if you can deliver on that promise. Be honest about what you can do and can’t do. If you know you can’t deliver on something, or you aren’t sure, it is better for both you and the client to be upfront about this.
What is something you’ve learned during the recent crisis?
Consistency is key. Scheduling a regular call with your customers is especially important during times of crisis. And maintain this consistency after the crisis has subsided. A crisis call shouldn’t be the first call you’ve had in a while.
What can companies do now to prepare for the next crisis?
Always have a crisis playbook that can be adapted to any situation. We might not be able to predict the next pandemic, or weather situation, or power outage, but companies should have a foundational plan and predetermined chain of command for dealing with things like rapid shifts to remote work; evacuations; damaged servers; ransomware; and more.
Do you have any other tips for client-facing businesses?
Don’t take anything personally. People deal with crises in different ways, and you never know how a person is being affected personally. Maintain your calm, be empathetic and do the best you can do. Listen more than you talk. If you keep these points in mind, you can gain and build on stakeholder trust that will last long after the crisis resolves.
Louis Schiavone Jr. is president of Avenu Insights & Analytics.
The June California Legislative Update covers the passage of the state budget and a number of bills related to the CARES Act. staff is currently monitoring 15 bills that seek to modify existing local taxes and impose new fees. This update provides the latest information on this legislation as well.
On June 15th, the Legislature passed the State Budget Act for the 2020-21 fiscal year. Our understanding is that the Legislature and Administration have not yet reached a final agreement; however, they have agreed to continue discussions and keep working on a compromise. The Budget Act and two trailer bills were sent to the governor and are further described in this report.
Governor’s Office of Business and Economic Development: The Legislature’s budget approves a total of $100 million to support the California Infrastructure and Economic Development Bank’s loan guarantee program that provides financial assistance to small businesses.
Revenues: The provisions of AB 85 include a total General Fund benefit of approximately $4.4 billion in the 2020-21 fiscal year.
Read the full June California Legislative Update Here.
CLIENT UPDATE #1: Sales and Use Tax: Avenu has been hard at work developing economic assumptions on which to build revenue projections for each of our clients. For many of our clients, Sales and Use Tax is a primary revenue source and one that currently is in a state of flux. The pandemic has caused reduced economic activity, business closures, and uncertainty about the future. The recent Sales Tax Executive Order from Governor Newsom also impacted sales tax cash flows. This communication is intended to explain the lower than normal first quarter 2020 allocations to local governments resulting from the pandemic and the Governor’s Executive Order.
Sales and Use Tax Liabilities Deferred by CDTFA:
Extension Program: On April 2, 2020, Governor Newsom issued Executive Order N-40-20 that allowed businesses with under $1M in tax liability to delay their first quarter sales and use tax filings for 90 days. This action means that first quarter filings for these businesses, normally required by the end of April, could be delayed until the end of July.
Deferral Program: Another state program allows small businesses ($5M or less in taxable sales) to defer up to $50,000 of their sales and use tax liabilities until next fiscal year. For those who request the deferral, the owed amount would be payable in twelve equal installments over the following year and would not be subject to interest or penalties as long as these payments are made. The payments will start in August 2020 and they will not extend beyond July 31, 2021.
Learn more about what is happening in California, and read the full June COVID-19 update here.
Key takeaways regarding budgeting and how to approach the unknown amid the current COVID-19 crisis
Cities across the country are deep into the preparation of their FY2021 budgets, a job that is difficult in the best of circumstances for both City Managers and Finance professionals. However, under the current pandemic conditions, it is seriously daunting and looks almost impossible. This is particularly true for those jurisdictions preparing multi-year projections. The first challenge is doing the projections at all. The second challenge is working with your elected officials, bargaining groups, and community to accept them!
So how do cities prepare budgets in these radically uncertain times?
The key is the assumptions underlying the numbers. In any crisis management challenge, accurate information is critical. However, the more turbulent and uncertain the environment in which the budget has to be developed, the greater the importance of collecting broad data to support grounding assumptions; and the more critical it becomes for staff to share that supporting data and their related analysis with their elected officials.
That brings us to COVID-19 and the unknowns of the rapidly evolving economic landscape. While all cities currently share the same general uncertainty, each community is, in fact, unique. They are different in size. Their business community mix may be very different than the adjacent communities. Their social priorities may vary widely. Their ability to deliver services, and the type of services they deliver, may differ. Their population may be younger or older than other communities. So, while certain assumptions may apply across all of them, others are going to be unique to each community.
With this in mind, how does each city approach budget development?
There are four areas that any city must now consider when building their FY2021 budgets (particularly when building Year One of a multi-year budget), although how they gather information and the resulting assumptions they make may vary widely:
Download our recent White Paper: Budgeting in a Sea of Unknowns to read more as we outline ways to approach budgeting in these uncertain times.
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