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Governments eye new taxes on cigarettes, homes and tech giants to pay for big budget shortfalls related to the coronavirus

Without more federal aid, local leaders across the country say they may have no choice but to try to raise revenue on their own in the middle of an economic crisis

Stacks of $1 notes bearing the name of Treasury Secretary Steven Mnuchin move through a machine at the U.S. Bureau of Engraving and Printing in Washington. (Andrew Harrer/Bloomberg News)
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Cash-starved cities and states across the country are starting to weigh whether to raise taxes on homes, cigarettes, local businesses and global tech giants, hoping to rake in new revenue that might help them close the massive budget shortfalls created by the coronavirus pandemic.

The increases that have been proposed — and in some cases adopted — reflect growing desperation on the part of government leaders nationwide. Many have found that recent spending cuts, furloughs and layoffs have not been enough to shore up their sagging finances, forcing them to consider more politically noxious and economically risky moves in the middle of an economic crisis.

“No politician wants to lead with raising taxes,” said Mark Mazur, director of the Urban-Brookings Tax Policy Center. “When they get there, it’s because they’ve run out of other options.”

Philadelphia increased fees on parking and raised wage taxes on workers who reside outside the city. Chicago Mayor Lori Lightfoot (D) said this month she could not rule out a property tax increase to cover her city’s $700 million budget shortfall. From New York to Seattle, other states and municipalities have considered a wide array of prospective rate hikes in response to major drops in once-reliable sources of income — and months of failed attempts to get Congress to authorize more federal aid.

Nashville leaders even took the eye-popping step in June to increase property taxes by about 34 percent, a move meant to help pay down rising public education costs — and one that quickly sparked a public outcry.

The city’s rates long had been historically low, according to Bob Mendes, an at-large member of the Nashville Metro Council who helped craft the budget blueprint. An increase helped pave the way for the city to close an anticipated $216 million financial hole in the 2021 fiscal year without severely hamstringing much-needed public services, he said.

“I’m definitely worried,” Mendes added about the budget, expressing lingering fears that Nashville is going to have to scrape to get by. “There’s probably never been a revenue projection that’s as wrong as this one is going to turn out to be.”

Unlike the federal government, which can cut taxes and rack up huge deficits with impunity, localities generally must balance their budgets each year. The coronavirus pandemic consequently has left many cities and states slashing spending on public programs, halting upgrades to roadways and water systems and laying off some of their own staff. The deep cuts have contributed to a total of 1.5 million lost public-sector jobs since the pandemic began, federal data shows.

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New tax increases can also help local governments offset the economic carnage caused by rampant unemployment and major slowdowns in shopping and tourism. But doing so is a risky proposition. It could imperil the country’s economic recovery before it begins in earnest, economists say, leaving residents and businesses to foot a bill that they may not be able to easily afford.

Budget experts increasingly believe they may have little choice to consider those more drastic measures in the face of Washington intransigence. City and state officials have spent months pleading with federal lawmakers to authorize as much as $1 trillion in new aid to help them close their deficits and stave off the worst economic consequences of the coronavirus pandemic. But they have encountered steep opposition from President Trump and top Republicans — and partisan bickering that has prevented any progress on another relief package for months.

“Given the size of the problem, they’re going to have to use every tool at their disposal,” said Elizabeth McNichol, a senior fellow specializing in state fiscal issues at the Center on Budget and Policy Priorities, a left-leaning think tank. “That includes spending cuts and revenue increases.”

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In New York, for example, more than 100 state assembly members and senators issued a joint public statement this month essentially calling on the state to tax higher-income earners to close a sky-high $17 billion budget deficit. “We will not allow state budget cuts without raising revenue from those who can most afford to pay more,” lawmakers warned.

Some New York legislators have set their sights specifically on Amazon, Facebook, Google and other tech giants that have profited handsomely even as the pandemic wallops the rest of the economy. Andrew Gounardes, a Democratic state senator, has called in recent weeks for new taxes targeting the collection and sale of consumers’ online data. (Amazon founder and CEO Jeff Bezos owns The Washington Post.)

Similar proposals have been put forward by policymakers for years, including in California, the home of Silicon Valley, and Maryland, where lawmakers advanced an online advertising tax before the coronavirus pandemic gripped the nation. In Seattle, city council members have taken a different approach, offering a flurry of new proposals to tax Amazon and other large employers in the state. There, and across the country, policymakers stress they hope to overcome longtime resistance from tech companies and other corporate behemoths to help fund programs in disarray because of the coronavirus.

“It’s just not possible to cut our way out of this hole,” Gounardes said.

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During the past three U.S. recessions — in the early 1990s, 2001 and the last major downturn beginning in 2008 — scores of cities and states found themselves in similar, dire financial straits. A wave of austerity soon swept city councils and statehouses nationwide, resulting in sweeping cuts to public spending and government workforces that in some cases did not return even after the economy improved.

Often, though, these cuts alone simply were not enough. During the Great Recession, some states raised income, sales and other business taxes along with a host of additional fees, according to a report at the time from the CBPP, which said the increases helped cover the costs of surging demand for government services.

More than a decade later, the economic carnage wrought by the coronavirus bears little resemblance to the recessions of years past. The economy had been booming before local leaders implemented stay-at-home orders to arrest the pandemic, and many cities and states entered the downturn with healthy cash reserves meant to protect them in the event of a recession. The extent to which these governments choose to close their new, unanticipated deficits through tax changes may hinge on the shape of the recovery — and a slew of epidemiological factors outside of economists’ control.

Some local leaders may face political challenges, finding themselves reluctant to “increase taxes at a time when many businesses are closed and residents are experiencing unprecedented economic hardship,” predicted a report from Moody’s Investor Service this month that outlines the grim financial future facing many states.

But early evidence suggests the coronavirus could lend at least some new political momentum for long-simmering campaigns to raise fees on a wide array of products and services, including alcohol, tobacco and gaming, said Jared Walczak, a state budget analyst for the nonpartisan Tax Foundation, particularly if those taxes can offset debilitating cuts.

“There’s going to be a sense in which any sectors that look comparatively healthy will be attractive targets for taxation over the next couple of years,” he said.

This month, Georgia lawmakers are eyeing their first tax hike on cigarettes in decades, a move that has gained some traction since the pandemic cut an approximately $2 billion hole in the state’s budget. In Colorado, meanwhile, legislators are forging ahead with their own plan to raise taxes on nicotine and vaping products, which is expected to raise more than $80 million in revenue next year. The tax, proposed before the pandemic took hold, will be put before voters later this year.

Initially, state legislators had hoped to put the new revenue toward funding preschool education, said Dominic Moreno, a Democratic state assembly member. But the coronavirus forced lawmakers to rethink their plans and instead channel money to the state’s general fund to cover the cost of a public-health crisis they never anticipated — and a budget catastrophe for which Washington so far has provided only limited aid.

“If there were additional federal resources,” Moreno said, “I don’t think we’d be as desperate for revenue as we are now.”