Tax Day trade-offs

April 15 usually marks Tax Day – but this year, it’s just another Wednesday, a reminder that nothing is “business as usual” in the middle of a global pandemic.

With large sectors of our economy shut down and unemployment claims soaring, extending the deadline to July 15 was the right thing to do as many Americans grapple with sudden hardship and uncertainty.

But added time for taxpayers also adds to the financial challenges facing Indiana. For local governments in particular, the chronology of tax collections makes a difference.

At the state level, Indiana’s March revenue report offers clues to COVID-19’s fiscal impact. Dine-in restaurant and bar restrictions started on March 16th, many manufacturing plants were idled a few days later, and social distancing rules tightened over the next two weeks.

As a result, sales and income taxes (Indiana’s two largest revenue sources) finished nearly $35 million below monthly forecasts. Gaming and corporate taxes were also down sharply.

In total, March general fund revenues were $63 million below what lawmakers anticipated to support the 2020 state budget. It’s easy to extrapolate revenue losses totaling a billion dollars or more by the end of the calendar year.

Health and safety costs combined with mounting revenue decline will continue draining the state’s rainy day funds. April is typically Indiana’s biggest revenue month: With the tax deadline moved to mid-summer, state government faces short-term cash flow complications and a tougher budget climate for priorities like teacher pay when the General Assembly meets in January.

Local government confronts a longer timeline. Local income taxes are distributed to counties according to the previous year’s tax returns processed by June 30th. Since this year’s filings are based on last year’s income, it’s two years between earning a paycheck and adding to local coffers.

So 2021 wouldn’t be affected much by COVID-19 … except for the delayed deadline. If a large number of Hoosiers wait until after June to file, local income tax revenues could decline next year – unless state policymakers decide to extend their calculations past the end of the fiscal year.

Regardless, local revenues will be affected by today’s economic disruption in 2022 and beyond. A deeper recession will continue to take a toll on personal income and real estate values could follow, shrinking the property tax base and lowering tax levy limits.

Local budgets across Indiana still haven’t fully rebounded from the Great Recession. The coming months could shape another decade of taxing and spending choices. That means local infrastructure, police and fire protection, other essential services and quality of life investments facing cutbacks long after the public health crisis passes.

We’re all eager for a safe return to normal – going back to work, relaxing with friends at our favorite bars and restaurants, preparing for back to school. Rebuilding the economy will take time: Some employers will close, some jobs won’t return. Factories may re-open to strained supply chains and sluggish demand.

As taxpayers, we should prepare to hunker down even longer. Indiana’s surplus was built over a decade but could be undone in little more than a year; a three-month delay in the tax deadline could hit local budgets two or three years from now. We can slow the spread of the coronavirus by making smart choices today, but the ‘fiscal curve’ of this pandemic for state and local government will take years to flatten.

The Indiana Fiscal Policy Institute is Indiana’s only independent, non-partisan and non-profit research center focused on state and local tax and budgetary policies – learn more at www.IndianaFiscal.org.