States such as Texas, Florida and Arizona are seeing the progress made in recent months against COVID-19 quickly disappear as infections and hospitalizations increase dramatically. These and other sales-tax-dependent Sun Belt states have been slammed with revenue losses as consumer spending fell dramatically after the shutdowns. As new cases spike in states across the region — many of which were among the nation’s first to begin reopening — it’s not certain how their economies may be further impacted.
This post is part of our “COVID-19 and Cities” series, which features experts’ views on the global pandemic and its impact on our lives.
On Thursday — the second consecutive day Texas has reported nearly 6,000 new COVID-19 cases — Gov. Greg Abbott announced the state’s phased reopening would be suspended. Initially, Abbott said businesses that have already reopened may continue to operate, but he amended that on Friday morning, ordering all bars in the state to again close. Abbott also said restaurants will have to scale back operations to 50% capacity. Since June 12, they had been allowed to operate at 75%.
“The last thing we want to do as a state is go backwards and close down businesses,” Abbott said in a statement Thursday. “This temporary pause will help our state corral the spread until we can safely enter the next phase of opening our state for business.”
A number of Houston restaurants have reopened and closed again following positive COVID-19 testing among staff members, raising the question of whether similar re-closings could prolong the pain of both lost sales tax revenue for the city and lost income for business owners and workers.
Kinder Institute research shows state and local limits
A pair of research reports recently released by the Kinder Institute for Urban Research indicate the Sun Belt region’s largest cities, including Houston, Dallas and San Antonio, likely are in for several years of budget tightening as a result of the coronavirus pandemic.
Across the Sun Belt, small government — at both the state and local levels — is the norm, especially compared to older large cities in the Northeast and Midwest. In large part, urban policy in America is created using those cities as the model, according to “The Urban Sun Belt: An Overview.”
Excluding California, Sun Belt states also have lower tax rates — a point of pride for most — which translates to less spending per capita. On average, they spend $5,629 per capita while states outside the region spend an average of $7,215 per capita. Overall, states in the Sun Belt have low property and income taxes. An exception to this is Texas, which has no state income tax but some of the highest property tax rates in the nation. The states make up for this through sales tax — eight of the 10 states with the highest average sales tax rates are in the Sun Belt.
In Texas, the three largest cities — Houston, Dallas and San Antonio — depend on retail sales tax for 29%, 23% and 26%, respectively, of each city’s general fund revenue. That’s according to the Kinder Institute’s recently released report “Troubled Fiscal Times,” which compares the revenue sources and service levels of the three cities in Texas with populations of 1 million or more. All three will see an estimated 10–15% loss of revenue because of COVID-19.
According to the Kinder Institute’s City Finance report, the City of Houston predicted that from the beginning of the COVID-19 crisis to the end of FY 2020–21 in July 2021, the city’s sales tax revenue would drop by almost $100 million.
Tracking COVID-19’s economic impact
Harvard University-based researchers studying the economic impacts of COVID-19 have created a real-time tracker showing changes in the spending habits of consumers in low-, middle- and high-income households across the United States since the pandemic began. According to their analysis, which is based on credit card data and is available on the Opportunity Insights economic tracker website, nationwide consumer spending by high-income households dropped 17% between January and June. In low-income households, spending declined only 4% during that time.
The decreased spending patterns of the wealthiest 25% of Americans accounted for two-thirds of the total decline in spending since the precipitous fall that began in mid-March, bottoming out around the first of April before starting a steady climb in mid-April after federal stimulus checks went out. Since that time, the analysis shows, lower-income households have returned close to pre-pandemic spending levels, while the wealthiest households continue to spend much less.
In Texas, consumer spending fell 13% overall — 14.4% for high-income households compared to 4.8% for low-income households. Consumer spending decreased 14.2% in Houston, 15% in Dallas and 7.2% in San Antonio. Those reductions translate to lost revenue for the cities and lost jobs for residents, especially low-income workers.
Low-income workers are suffering
Between 2000 and 2016, the Sun Belt’s 22 largest metropolitan areas — the Urban Sun Belt — added an estimated 1.6 million retail, accommodation and food-service jobs. However, the relatively low-paying service jobs in this sector were hit hardest by the efforts to slow the spread of COVID-19 in the past several months.
For example, according to the Opportunity Insights team’s tracker, employment rates in Houston decreased by 31.4% for low-income retail workers and by 34.7% for low-income restaurant and hotel workers between January and the end of May. In New Orleans, employment rates fell 72.2% for low-income restaurant and hotel workers and 42% for retail workers. Nationwide, the COVID-19 economic crisis has impacted low-income workers the most, but they’ve been hit particularly hard in New Orleans, where overall employment rates dropped almost 55% for low-income workers.
The impact of those job losses, as well as the loss in sales tax revenue, which makes up large portions of cities’ income, is and likely will continue to be strongly felt in Sun Belt states.
Facing constraints to crisis response
Not only are city- and county-level governments in Sun Belt states limited in their ability to address urban issues, their capacity to respond in times of economic crisis like the one resulting from the COVID-19 shutdown is constrained. The Kinder Institute’s City Finance report shows that, of the three biggest cities in Texas, Houston is the most constrained in its options for increasing revenue.
On top of that, Houston already faced fiscal instability before anyone ever heard of SARS-CoV-2. When the consulting firm PFM created a 10-year financial plan for the city in 2017, it predicted a structural deficit of more than $100 million every year for the next decade — that’s $1 billion between 2018 and 2027. As the Kinder Institute’s analysis of city finances points out, that projected deficit came after pension reform but before Proposition B and before the full fiscal impact of Hurricane Harvey was known. Houston City Controller Chris Brown estimated the city’s structural deficit for FY 2020–21 to be $156 million. These existing financial struggles have only been worsened by the COVID-19 crisis.
Several factors limit Houston’s ability to provide public services compared to Dallas and San Antonio. “These include the locally imposed revenue cap, the lack of a solid waste fee, the fact that the city maintains its own health department and the sequestering of general fund revenues for public works under ReBuild Houston. The first two factors constrain the city’s revenue while the second two factors help to dictate the allocation of financial resources.”
In turn, to reduce budgets, funding for city services is cut. And the services most likely to be defunded are those such as parks and public libraries as opposed to police and fire.
Short-term solutions only work in the short term
The loss of sale tax revenue from the shutdowns combined with the downturn in the oil industry left Houston with a projected $169 million budget deficit for the upcoming fiscal year. Originally, Houston Mayor Sylvester Turner thought deep spending cuts, sapping the $15 million rainy day fund and furloughing some 3,000 city workers would be necessary to make up for the deficit. In the end, the Houston City Council approved Turner’s proposed $5.1 billion budget for the fiscal year 2020-2021 — one that didn’t include drastic cuts.
Instead, the city will use part of the funds it receives through the CARES Act to fill the gap. Houston could get up to $404 million in coronavirus relief money, while San Antonio and Dallas can receive up to $270 million and $234 million, respectively. However, restrictions on that money limit use to expenses related to COVID-19 between March 1 and Dec. 30.
“When you’re talking about Houston, $400 million sounds like a lot of money, it’s 15% of the general fund,” Kinder Institute Director Bill Fulton told the Texas Tribune. “But if you can only spend that money on certain things and spend it in a short period of time, you’re probably not going to solve all your budget problems, and what do you do the next fiscal year?
“It will help some and it will help in the short run, but it won’t solve the problem,” Fulton said.
Houston’s budget includes $964 million in police funding — a $19 million increase from last year. That 2% increase comes as protestors across the nation continue to march against police brutality and call for reductions in police funding in the wake of the killings of Black Americans in police custody. Meanwhile, cities such as Dallas and Austin have indicated support for cutting police funds and using that money to make more community investments.
According to the Kinder Institute’s city finances report, Houston, Dallas and San Antonio all spent roughly the same amount on police service — $310 — per capita last year.