In his effort to relieve small businesses that are hurting during the coronavirus crisis, Gov. Gavin Newsom on April 2 signed an executive order allowing them to defer sales tax for up to 12 months. But in doing so, Newsom may have robbed Peter to pay Paul—Peter being city and county governments.
Sales tax is collected by the state but a portion of it goes back to local governments, forming an important revenue stream that pays for municipal services like police, fire, building inspections, and public works. Depending on which city and county, sales tax ranges from 7.25 percent to 10.25 percent with everything over 6 percent going back to local government. It is unclear from Newsom’s order whether the state will continue making local payments during the deferral period.
The uncertainty about the availability of sales tax revenue is adding to the already considerable pressure on city budgets due to the Covid-19, several Monterey County city managers tell the Weekly.
“We simply don’t understand what the state means, how it will be applied and how it will impact our budgets,” Del Rey Oaks City Manager Dino Pick says. “It has the potential to be devastating. It’s a bold and good gesture by the state of California to try to keep small businesses afloat so I applaud the initiative. We simply need to understand the implication of that on cities.”
Even if the state does make payments to cities, many shops are closed and the larger economy has taken a downturn, meaning that sales totals will be lower. The finance staff of the county’s largest city, Salinas, is projecting a $4.8 million to $6.9 million decrease in sales tax revenue for the year, marking a major dent in the city’s $141 million budget. (The loss estimate is preliminary and is likely to be revised in the coming weeks.)
Other city revenue sources are also in peril. Hotel tax is down everywhere as travel is restricted and tourism has come to a standstill. In Salinas, the room occupancy level is down to 20 percent from the usual 75 percent, according to finance officials. On the more tourism-dependent Monterey Peninsula, some city managers say that they are still crunching the numbers. Monterey and Seaside city managers say revenue projections will be prepared in the next two weeks.
Anecdotal evidence for the coming financial hazard is plenty. “The things that are challenging for Seaside, in particular, are car sales and they are absolutely trending downward,” Seaside City Manager Craig Malin says. For Del Rey Oaks, cannabis tax is especially important, providing about 16 percent of the city budget. “Cannabis business tax is an enormous source of revenue for Del Rey Oaks,“ Pick says. “Dispensaries are considered essential due to medical cannabis use. There’s still a downturn in sales, is what we are hearing.”
Even in Sand City, home to some 400 residents—and a Costco and a Target where shoppers have lined up for supplies—officials are bracing for fiscal damage. “Having Costco and Target is very helpful, even though they are underperforming for their standard,” City Manager Aaron Blair says.
Less revenue will inevitably mean less spending—and fewer services for residents—but cities say they are able to maintain public safety for now. As for construction projects, libraries, parks and other civic services, their fate remains to be seen.