March Madness is back in Indy, Governor Holcomb is easing COVID restrictions and opening vaccine eligibility, and cases continue to fall…after a year of hardship, better times are on the horizon. Hoosier bars, restaurants and caterers are especially eager to rebound after reeling from the crisis; the curve of the pandemic is especially obvious in food and beverage (FAB) tax collections in certain communities.

The Indiana Fiscal Policy Institute took a closer look at local FAB revenues in 2020 – spoiler alert, monthly collections were crushed by COVID, finishing $15.3 million (-15%) below 2019. The decline isn’t surprising, but is a timely reminder about the limits on local revenues, and therefore local capacity to invest in economic recovery as we rebuild from this pandemic.

FAB taxes are authorized by the state legislature and enacted by local governments for specific purposes like construction and infrastructure projects, economic and community development programs. They pay for sports arenas in Indianapolis, Fort Wayne and Evansville, the Basketball Hall of Fame in New Castle, wastewater improvements in Cloverdale, the Grand Park sports complex in Westfield and more.

Across Indiana, 32 cities and counties currently collect FAB. Their shared loss of $15.3 million isn’t an existential threat to the fiscal well-being of any unit. Most significantly, Marion County alone accounted for $11 million of the total decline, forcing the Capital Improvement Board to borrow from its reserves.

There is a brighter side on local revenues: Property taxes are stable, sustained by a healthy real estate market across most of the state. But tax caps and levy controls have shifted reliance towards local income taxes, which are more sensitive to short-term economic trends and therefore less predictable.

FAB revenues are even more volatile – when consumer behavior changes, the impact is immediate. Our analysis shows the month-by-month fluctuations connecting tax collections with case trends and public health orders. Revenues went off a COVID cliff in April and May 2020 before stabilizing over the summer. September was better-than-expected as people tried to resume more normal routines – only to spiral in October as cases surged in response.

These FAB losses aren’t catastrophic on their own, but contribute to a pattern of more uncertain revenue and growing fiscal pressures on many localities, particularly larger cities and urbanized counties.  These are also the places that tend to drive statewide employment, population and economic output, even as their flexibility to spend beyond essential services is increasingly limited.

Local budgets are already lean, and the disruption of even minor revenue streams has a domino effect on basic obligations like fire and police protection, picking up trash and patching potholes. We use FAB, innkeepers and other special taxes to spur downtown redevelopments, build convention and sports facilities, and support livability initiatives – but COVID has shown how cyclical these revenues can be.

As we work for a safe reopening and robust recovery, we shouldn’t let these efforts become casualties of the public health crisis. Some state lawmakers have questioned whether Indiana is spending enough on economic development; the state’s business climate also depends on local and regional appeal to people and employers.

To this end, the current state budget plan includes $150 million for Governor Holcomb’s Regional Recovery Grant program. This is a relatively minor slice of the two-year, $36 billion total budget that could nonetheless have a major impact on regional vitality, encouraging local governments to work together and commit to more ambitious projects with the confidence of state backing. As we head into the homestretch of budget negotiations, this proposal should survive or be strengthened.

Comparing the monthly ups-and-downs of local food and beverage taxes to the relative stability of state revenues through COVID, there’s a solid practical case for increased investments in these priorities. Quality of life is shaped locally, but the payoff for building thriving communities extends statewide to our economy and tax base.

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