April 2, 2020

Businesses will be able to “layaway” up to $50,000 of sales tax liability pursuant to an announcement by the Governor today. The deferral, which could come to as much as $3 billion statewide and provide relief for up to 300,000 businesses, would have a significant effect on county budgets, relying as they do on sales tax revenues to fund 1991 and 2011 realignment programs, transportation projects, public safety, and of course general fund programs broadly.

For businesses, the 12-month deferral will allow them to keep the sales taxes collected from consumers, providing cash flow relief via what is essentially a loan from the state, counties, and cities. Similar to the payroll deferrals allowed by the federal government, the money would still have to be paid back at a later date. In this case, according to early reports, the amounts would be subject to a payment plan with payment coming by July 2021 (though the language of the Executive Order was not yet available at the time of this writing).

While many of the details are still forthcoming from the Administration, the order will have the almost immediate effect of reducing cash flow for counties and cities, as well as the state. If the total comes to $3 billion—which the Administration has put forth as a high-end estimate, but still only an estimate—that would temporarily reduce revenues by approximately the following amounts.

• State General Fund – $1.4 billion
• 2011 Realignment – $375 million
• 1991 Realignment – $175 million
• Proposition 172 – $175 million
• County Bradley-Burns – $45 million
• City Bradley-Burns – $310 million
• Transportation Bradley-Burns – $90 million
• County District Taxes (including transportation) – $360 million
• City District Taxes – $65 million

Counties should note that these reductions are temporary deferrals, not permanent cuts. However, the effect on cash flow should be taken into account as counties prepare to adjust and adopt their budgets.

Many questions remain. Will the revenue be attributable to when it was due or when it is paid? This could have significant consequences for the allocations of realignment revenues, for which “base” revenues are allocated differently than growth. For which months or quarters will the layaways be allowed? Will the repayments be regular or weighted to the back end? What

Of course, these deferrals come on top of the revenue losses that accompany any economic shock or recession. Every recession affects county revenues differently. So far, it appears that this one will have outsize effects on sales taxes, personal income, and likely corporate income taxes. While the state was able to build up substantial reserves thanks to record-setting revenues over the past decade, many county general funds are still struggling to recover from the 2008 economic crisis. CSAC has continued to be in constant communication with the Governor and others in his Administration, and will use those channels to relay counties’ concerns with this new order.