With governors across the country issuing stay-at-home orders and requiring the partial or complete shutdown of businesses in response to the COVID-19 pandemic, state governments have simultaneously experienced significant revenue shortfalls and increased spending. Unlike the federal government, which can incur budget deficits, states are required by their constitutions to balance their budgets every year.
As a result of COVID-19, the Center on Budget and Policy Priorities has issued an estimate of the revenue shortfalls in all 50 states for Fiscal Years 2020, 2021 and 2022. According to the estimate, states could incur an aggregate revenue shortfall of $185 billion in Fiscal Year 2020, $370 billion in Fiscal Year 2021 and $210 billion in Fiscal Year 2022 for a total of $765 billion in lower tax and revenue collections over the three-year period.
This means that every state could experience budget deficits in the hundreds of millions of dollars, with some states falling billions of dollars short in comparison to regular projected revenue. With the potential for losing approximately 20 percent of their expected revenue, and in the event that the federal government does not provide additional federal aid to replace some of the lost revenue, state governments will be faced with large spending cuts, significant tax increases, or a combination of both in 2021 and into the following years.
While states impose taxes in a variety of ways—including income taxes, sales taxes and corporate taxes—one area that state lawmakers will likely focus on for raising additional revenue will be state cigarette and tobacco product tax rates. This threat of cigarette and tobacco product tax increases needs to be taken seriously by retailers because cigarettes and tobacco products make up a significant portion of in-store sales for the average convenience store.
With the state and national elections now having been concluded, retailers need to be proactive and reach out to their state lawmakers ahead of the coming 2021 state legislative sessions. Communicating with lawmakers about the impact of higher cigarette and tobacco product tax rates is critical to educate elected officials about the consequences of higher tax rates. Perhaps now more than ever, the budget shortfalls that states will be facing require retail businesses to contact the state lawmakers that represent the districts in which their stores are located and urge them to oppose cigarette and tobacco tax increases because of the unintended consequences that will result.