Kentucky State and Local Government Revenue Impacts from Covid-19 Episode

Through the Spring and Summer, Kentucky faced unprecedented economic challenges due to the state shutdown. Record unemployment, business closures, and more will almost certainly have long term impacts. One area that our organization took interest in was government revenue. While early predictions spread doom and gloom type scenarios, what is the reality of the situation?

Our newest research summarizes the recent fiscal impacts of the Covid-19 on Kentucky state government and selected major local governments in the state. We obtained General Fund revenues and major tax components for eight large local governments, plus state government, for the last three fiscal years (all on a July to June basis). While not comprehensive, the fiscal data do point to some defensible conclusions.

The economic news was ominous during the Spring, with Kentucky posting the highest proportion of workers filing for unemployment benefits of any state. This and the various government mandates to close stores and cancel events led to widespread fear among fiscal analysts that major tax revenues would plummet. But the predicted severe loss of tax revenue in Fiscal Year 2019-2020 simply did not occur. In retrospect, there were several causes.

Major Findings:

• While the virus-related shutdowns began in March, tax receipts were growing strongly up to that point in the fiscal year. Moreover, tax payments lag economic activity, so that the expected drop in occupational and net profits taxes at the local level, and income and sales taxes at the state level, did not really show up until May. At that point, the fiscal year was already ten months old.

• The unprecedented unemployment levels in the Spring were primarily concentrated in industries relying on part-time, low-pay, occupations. Thus, the job losses were much worse than the payroll losses. Most of the important tax receipts are related to payroll growth, not jobs.

• Property tax receipts provided stability to all governments’ General Funds, growing steadily throughout. Also, insurance premiums taxes, a major source of revenues to municipal governments, proved to be insensitive to the economic downturn.

• There were also some mitigating factors. For example, Kentucky state government received a windfall in individual income tax receipts due to withholdings from the huge unemployment insurance payments, including the $600 weekly federal supplement. State government also received sales taxes on the Spring-spike in online retail shopping. State and local governments were able to use some of their rainy day funds to balance their FY20 budgets, as well as some payments from the $1.5 billion federal relief payments to Kentucky governments for Covid-related expenses.

• Beginning in March, local and state governments watched expenses carefully for the remainder of the fiscal year. This did not help the revenue picture, but did help governments handle necessary expenditures. Kentucky state government actually increased its rainy day fund.

Read the full report Kentucky State and Local Government Revenue Impacts from Covid-19 Episode available now