US states that relied more heavily on sales tax revenue were more likely to impose shorter stay-at-home orders and business closures during the COVID-19 pandemic, according to an analysis published late last week in Contemporary Accounting Research. The findings highlight how fiscal pressures may have influenced public-health policy decisions.
The study, led by researchers at North Carolina State University (NCSU), examined whether differences in state tax systems were associated with the length of COVID restrictions. The researchers analyzed data from all 50 states and the District of Columbia, comparing each state’s tax revenue structure with the length of its pandemic restrictions.
The findings suggest that states that depended more on sales taxes as a source of revenue tended to keep pandemic restrictions in place for shorter periods. “We find that states that are more dependent on consumption taxes experienced shorter durations of stay-at-home orders, restaurant closures, and bar closures,” the authors write.
Reliance on sales tax for revenue may have 'implicitly entered into the equation when determining the length of stay-at-home orders.'
Anticipated losses in sales-tax revenue during lockdowns may have shaped how policymakers weighed public-health restrictions. “The perception that business closures would create tax revenue shortfalls created an incentive for state policymakers to reduce the length of such closures,” the authors write, arguing that reliance on sales tax for revenue may have “implicitly entered into the equation when determining the length of stay-at-home orders.”
Wide variation in state tax structures
The study builds on the fact that states vary widely in how they collect revenue. Some states rely heavily on consumption taxes, while others rely more on income taxes. For example, Washington state has no income tax but collects a 6.5% sales tax, while neighboring Oregon has no sales tax but instead relies on a 9.9% individual income tax rate.
For the study, the researchers controlled for multiple factors that might also influence pandemic responses, including the political affiliation of the state’s governor, historical voting patterns, population density, unemployment rates, poverty levels, minimum wage, and geographic region.
The researchers were particularly interested in controlling for political affiliation, since political views could influence both tax policy and pandemic restrictions. By adjusting for the governor’s political party and state voting patterns in the 2012 and 2016 presidential elections, they found that the association between tax structure and the duration of restrictions remained.
When the analysis was divided by states that leaned Republican or Democratic in recent presidential elections, reliance on sales taxes was still tied to shorter stay-at-home orders and restaurant closures in both groups. But for bar closures, the pattern held only in states that leaned Democratic, a finding that “contradicts the concern that Republican states may be more likely to rely more heavily on sales tax and have shorter closures in general,” the authors note.
“For this study, we looked at a host of state data—and it is important to note that observational studies cannot prove causation,” first author Nathan Goldman, PhD, said in an NCSU press release. “However, we did find a very strong correlation between a state’s sources of revenue and its public-health policies during the early days of the pandemic.”
Fiscal policy may shape crisis responses
The authors emphasize that the findings do not mean that tax policy directly caused states to lift restrictions earlier, but that fiscal structures may create pressures that influence decision-making during crises.
“Our findings suggest that anticipated shortfalls in consumption tax revenue may have shaped public health responses, consistent with tax system structures relating, unintentionally, to crisis management decisions,” they write.
According to Goldman, understanding how fiscal systems interact with public-health policy could help inform future crisis planning. “Studies like this one underscore the complex set of issues that inform public-health decisions and could shed light on how tax policies can constrain or influence policy issues seemingly unrelated to state revenue,” he said.
The findings highlight how fiscal structures may shape policy decisions in ways that are not always obvious, note the researchers, and they say additional research should explore those connections.
“Our study offers an interesting example of tax policy being significantly associated with a non-tax policy,” they write. “Future research should continue to investigate the incentives created by tax policy and its relations to seemingly unrelated policies.”
