Impact of COVID-19 on City Revenues


In November 2020 we published an economic forecast model to estimate the impact that the response to the COVID-19 pandemic would have on the revenues of cities throughout California. We found that almost all cities were projected to lose some revenue, but we found that COVID-19 restrictions significantly affected cities that rely on tourism and entertainment. We updated our assessment in August 2021 to determine the financial situation of California cities in light of stimulus payments from the federal American Rescue Plan Act, property taxes, and increased tax revenues as the economy has started reopening.

We analyzed three factors to identify the extent to which cities were affected by the response to COVID-19:

  • We updated our economic forecasts to estimate the extent to which city revenues will change between fiscal years 2019-20 and 2021-22.
  • We gathered data from the California Department of Finance and the U.S. Treasury to determine the amount of American Rescue Plan Act of 2021 funds cities have received and are estimated to receive. We compared these amounts to estimated changes in revenue from hotel taxes, sales and use taxes, business license taxes, parking taxes, and admission taxes, which last year we identified as the taxes most likely to be affected by COVID-19.
  • We analyzed changes in property taxes using economic forecasts and estimates from the State Controller's Office (State Controller).

We contracted with the California Economic Forecast to develop the economic forecasts we used in this analysis. These forecasts are conservative and do not take into consideration current events, such as wildfires or significant changes to COVID-19-related circumstances, that may further affect cities' revenues. The forecasts also incorporate the following assumptions about how the economy is going to evolve through the remainder of fiscal year 2021-22 through 2022-2023:

  • The California economy generally follows the U.S. forecast, which projects an accelerating pace of recovery in 2021. However, California's economy will lag the U.S. economy through the fall of 2021 due to California's more restrictive COVID-19 response that placed limitations on the economy for most of the first half of calendar year 2021.
  • In general, there is only a partial recovery of the California economy by the end of 2021. It is selective because the recovery favors industries deemed essential or those whose workers can and have remained employed from home or remotely. It also favors industrial workers associated with manufacturing, warehousing, and distribution.
  • The COVID-19 vaccine has slowed the spread of the virus, reducing cases in California and enabling the lifting of restrictions on business in June 2021.
  • The $5.3 trillion in pandemic relief since March 2020, including the latest American Recovery Act stimulus in March 2021, has provided strong income gains for Californians which has supported a full recovery of consumer spending on retail goods in 2021. Economic growth has increased since the spring of 2021 and is forecast to continue along a sustainable positive path into 2022 and 2023.
  • Many consumers however, will remain hesitant to participate in certain activities such as travel or public gatherings until there is more clear evidence that the pandemic is finally abating. Because of the recent Delta variant surge, the notion of full abatement has been delayed and consumer reticence will linger through 2021. Consequently, despite a near full opening of the California economy, total consumer demand on services will be slow to return to pre-pandemic levels.
  • Major events that rely on audiences were absent for the first six months of 2021. During the remainder of the year, large public activities and events with close physical contact will remain scarce or will be sparsely attended by consumers. This is a further reason for the lagging employment recovery.
  • Employment in state and local government sectors will begin to recover in fiscal year 2021-22. K-12 schools and higher education institutions are poised to open in the fall of 2021; consequently, public sector employment will receive a meaningful boost.
  • Residential real estate is booming. Housing has not and will not be impacted negatively by the 2020 recession or its aftermath during 2021 and 2022. Therefore, property tax and property transfer tax receipts will unlikely be impacted going forward, just as they have not been impacted to date during the entire pandemic.
  • The outlook also assumes higher levels of residential construction and a rebound in non-residential construction.
  • The general forecast for all regional economies in California is relatively optimistic for fiscal year 2021-22 and 2022-23, following the pandemic induced recession during calendar year 2020 and the slow economic recovery that extended through the first half of calendar year 2021. Most restrictions in California were lifted in mid-2021, resulting in a rapid return to normal economic behaviors that characterized the California economy prior to the pandemic. This trend occurs at the very beginning of fiscal year 2021-22 for all cities and counties in the state.
  • The forecast assumes that production and consumer spending on retail goods is fully restored during calendar year 2021. Sales tax receipts should therefore be largely restored by fiscal year 2021-22. Spending on consumer services will require another year to recover. Nevertheless, even as the economy recovers and business activity resumes without restrictions, the recovery of employment will lag other measures of California's economy. This is especially true for the leisure, recreation, hospitality, and amusement sectors, and personal services. Full restoration of employment in these sectors is generally projected to occur during fiscal year 2022-23 or by the end of calendar year 2023.
  • Full restoration of employment in California would produce higher revenues to cities directly from business license taxes. Full restoration of employment in leisure and hospitality services would indicate that transient lodging tax revenues are restored or have eclipsed pre-pandemic levels.
  • The Delta variant of the coronavirus that began to surge in much of the nation in mid-2021 is a possible threat to the forecast. At the time of the forecast, it was not assumed to influence this year's forecast, principally because the incidence of infection was still relatively contained in California and serious cases associated with the Delta variant together with death rates had not increased much.

Affected Revenue Sources

We identified the revenue sources that could be significantly affected by COVID-19 and analyzed city-level data from the State Controller to determine each city's reliance on those revenue sources. Based on our analysis and guidance from the California Economic Forecast, we evaluated the revenue sources included in Table 1.

Table 1: The Revenue Sources We Evaluated and Their Definitions

1. Hotel Taxes A tax charged to guests in hotels and other forms of lodging, including properties rented through home-sharing services. This tax—also referred to as transient occupancy tax—is levied for occupying a room, rooms, or other living space for a period of 30 days or less.
2. Sales and Use Taxes A tax imposed on the consumer for the total retail price of any tangible personal property and the use or storage of such property, unless otherwise exempted by law. This tax may also apply to purchases shipped to a California consumer from another state, including purchases made by mail order, telephone, or Internet.
3. Business License Taxes A tax on businesses for conducting business within the city.
4. Admissions Taxes A tax on the consumer for attendance at recreational and entertainment activities and events within the city.
5. Parking Taxes A tax on the occupancy of off-street parking spaces in specific locations, such as major airports and tourist destinations.

Source: League of California Cities, et al., The California Municipal Revenue Sources Handbook, Fifth Edition, Sacramento CA, 2020

We evaluated hotel taxes, sales and use taxes, business license taxes, admissions taxes, and parking taxes because we anticipated that COVID-19-related business shutdowns would significantly reduce these revenues. We also evaluated property taxes and property transfer taxes because they are collectively large sources of revenue for many cities.Property taxes are taxes imposed on real property (land and permanently attached buildings) and tangible personal property (such as boats, aircraft, or business equipment) based on the value of the property. Property transfer tax is the tax imposed on the transfer of ownership in real estate. Documentary transfer tax is a tax imposed on documents recorded in the transfer of ownership in real estate. Both types of tax are typically based on the value of the property being transferred. We excluded other types of tax revenues because our analysis indicated that they were likely not significantly affected by the pandemic response.

We used data collected by the State Controller from cities to calculate the percentage of revenue generated by each city from hotel taxes, sales and use taxes, business license taxes, admissions taxes, and parking taxes. To develop estimates of these taxes, we applied these percentages to the 2018-19 general fund revenue information we collected from each city's audited financial statements.

Only a small number of cities impose parking and admissions taxes. Parking taxes are generally collected near major airports or tourist destinations. Additionally, certain cities impose admissions taxes if they hold larger recreational and entertainment activities and events. The California Economic Forecast developed projections for parking and admissions taxes for the cities in Table 2 because the cities levied these taxes and the amounts were relevant for consideration.

Table 2: Cities That Levied Sufficient Parking and Admissions Taxes to Be Included in Our Analysis

Berkeley American Canyon
Burbank Avalon
Clovis Fairfield
Covina Indian Wells
Inglewood Inglewood
Los Angeles Irwindale
Malibu Pasadena
Millbrae Pomona
Oakland San Fernando
Ontario San Francisco
San Bruno Santa Cruz
San Francisco Wheatland
Santa Cruz
Santa Monica
South San Francisco

Twelve cities did not have fiscal year 2018–19 financial statements and three cities had fiscal year 2018–19 financial statements that did not conform to Generally Accepted Accounting Principles and were excluded as follows:

  1. Amador
  2. Artesia
  3. California City
  4. Clearlake
  5. Fort Jones
  6. Fowler
  7. Holtville
  8. Huntington Park
  9. Ione
  10. Isleton
  11. McFarland
  12. Ripon
  13. Riverbank
  14. Taft
  15. Westmorland

Economic Forecasts

The California Economic Forecast developed the economic forecasts that we used to project revenue changes to hotel taxes, sales and use taxes, business license taxes, admissions taxes, parking taxes, property taxes, and property transfer/document transfer taxes for each city. We applied these county-level projections to the cities within each respective county. The projections include a lower bound or minimum, the midpoint, and an upper bound or maximum for each revenue source by county. For our analysis, the minimum value represents the city's worst-case scenario in which it is most affected by the pandemic, and the maximum represents the city's best-case scenario in which it is least affected by the pandemic. We used the midpoint (or point estimate of the forecast) for our final analysis because that is the middle of the range, representing the most accurate projection according to the California Economic Forecast.

We summarize the information that the California Economic Forecast used to develop its projections in Table 3. It chose these particular economic indicators after its extensive testing demonstrated which indicators were most highly correlated with the revenue source over time.

Table 3: Data and Assumptions Used to Develop Economic Projections by Revenue Type

Revenue Source Data and Assumptions Used to Develop Economic Projections
1. Hotel Taxes
  • Hotel and motel tax revenue data from the State Controller through fiscal year 2018–19 summed for all cities in each county.
  • Actual leisure and hospitality employment data through May 2021. Statewide forecasts through fiscal year 2022–23 from the UCLA Anderson Forecast.
2. Sales and Use Taxes
  • Actual taxable sales for all California counties through March 2021.
  • Sales and use tax revenue data from the State Controller through fiscal year 2018-19 summed for all cities in each county.
  • Taxable sales forecasts for California from the UCLA Anderson Forecast through fiscal year 2022–23.
3. Business License Taxes
  • Business license tax data from the State Controller through fiscal year 2018-19 summed for all cities in each county.
  • Employment, payrolls, and taxable sales data at the county level through calendar year 2020. County forecasts through fiscal year 2022-23 generated in the county models using UCLA Anderson Forecast statewide forecasts.
4. Admissions Taxes
  • Admissions tax data from the State Controller through fiscal year 2018–19.
  • City forecasts based on county economic conditions through fiscal year 2022–23 and whether events were canceled or curtailed as a result of the pandemic.
5. Parking Taxes
  • Parking tax data from the State Controller through fiscal year 2018–19.
  • Total airport passengers for San Francisco International Airport, Los Angeles International Airport, Hollywood Burbank Airport, Ontario International Airport, Oakland International Airport, and other county-level regional indicators. Forecasts through fiscal year 2022–23 by the California Economic Forecast using county-specific economic models.
6. Property Taxes
  • Actual home sales and home selling values through April 2021.
  • Estimated property tax data from the State Controller through fiscal year 2020-21 summed for all cities within each county.
  • New completed real estate development, especially new homes. Actual property tax data through fiscal year 2020-21. Forecasts through fiscal year 2022-23 by the California Economic Forecast models, which are driven by the nationwide forecast by UCLA.
7. Property Transfer Taxes
  • Property transfer tax data from the State Controller through fiscal year 2018-19 summed for all cities within each county.
  • Dollar sales volume for county home resales. Actual tax data through fiscal year 2018-19. Forecasts through fiscal year 2022-23 by the California Economic Forecast models, which are driven by the nationwide forecast by UCLA.

Source: The California Economic Forecast. The UCLA Anderson Forecast was published on June 3, 2021.

All revenue forecasts use a prediction interval of 90 percent, which is statistically valid and provides cities a range that will be meaningful as they make decisions related to potential fiscal challenges. A prediction interval indicates a range of values that is likely to encompass the true value for a particular criterion. A prediction interval's level of significance—or percentage—represents the likelihood that the true unknown value (the forecast) resides in that range. With a 90 percent prediction interval, the California Economic Forecast is confident that in nine out of 10 statistical tests, the actual value exists in the given range.

For cities that generate significant admissions tax revenue through ticket sales to large public events, as we list in the second column of Table 2, such events have been canceled and were projected to be either prohibited or largely avoided by consumers from March 2020 through the end of fiscal year 2020-21. A prominent rebound was forecasted in fiscal year 2021-22, and beyond. That rebound started early in the city of Avalon with a pronounced increase in visitors beginning in April of 2021.

The California Economic Forecast analysis indicates that property taxes and property transfer taxes were not and will not be negatively affected by COVID-19 and are likely to increase in many counties across the State due to increased home sales and selling prices.

Summary of How Economic Forecasts Impact Local Revenue Generation

Changes to revenue sources are driven principally by economic forces that have been directly affected by the closures ordered as a result of the pandemic between March 2020 and June 2021. We provide a high-level summary by tax source below:

  • Hotel Taxes: The closure of hotels and short-term rentals to non-essential visitors for a number of intermittent months during 2020, and the general lack of visitor travel in California through the spring of 2021, directly and meaningfully reduced hotel taxes.
  • Sales and Use Taxes: Sales tax receipts from taxable sales on goods and services was affected by the closure of many retail operations including restaurants and merchandise stores, other than those stores deemed essential for the provision of food, personal supplies, and home supplies. This included grocery stores and larger general purpose retail chains like Costco, WalMart, Target, and Home Depot. However, for many counties in which there are such retail chains—or warehousing for retail goods—taxable sales increased due to the increased concentration of consumers purchasing at these stores or online.
  • Business License Taxes: These taxes are typically assessed on businesses operating within city boundaries, based on employment, payrolls, or gross receipts. Pandemic-related closures of businesses clearly reduced employment and corresponding payrolls and gross business revenues for many businesses. Assessed tax receipts would therefore be affected in tandem with these reduced metrics, especially for businesses associated with leisure, hospitality, recreation, entertainment, amusement, retail trade, wholesale trade, personal services, film, TV, and sound recording.
  • Parking Taxes: These taxes are typically based on fees collected for event parking at large venues, such as sporting events, concerts, or other entertainment. During the pandemic, nearly all of these types of events were canceled.
  • Admissions Taxes: These taxes are generally based on admission ticket prices for events, recreation, or entertainment at relatively larger venues within the city. For example, American Canyon received admissions taxes from card rooms, mostly the Napa Valley Casino. The city of Fairfield receives taxes from golf course admissions, Indian Wells receives admission taxes from the annual BNP Paribus Tennis Tournament, Irwindale collects taxes from the speedway in Irwindale, and in Pomona and San Fernando large swap meets generate nearly all of the admission taxes received in those cities. From March 2020 and into the first three months of 2021, all of these events were either canceled or substantially curtailed, limiting the generation of admissions revenue to vendors and, therefore, the taxes to cities.
  • Property Taxes and Real Property Transfer Taxes: Some of the revenue shortfall due to business and economy-wide closures was offset by the increase in property taxes and real property transfer taxes that occurred during the pandemic. Unexpected demand for purchasing housing throughout the State and nation amidst restricted supplies of housing boosted prices by as much as 50 to 70 percent in many regional markets from March 2020 to March 2021. This has resulted in extraordinary increases in real estate related taxes for counties and cities in California. As the pandemic eases however, real estate demand is easing and real estate supply is rising, both from existing home sellers and new home builders.