The immediate consequences of the pandemic on Main Street and decline in local tax revenue have been historic. As some cities and states begin to reopen after the government shut-down it appears that the “V-shaped” recovery many were hoping for has not materialized. There are several reasons that the economy and tax revenue will not quickly recover. There have been massive layoffs with over 40 million having received unemployment benefits in the past 10 weeks. There are a large number of over-leveraged zombie companies attempting to stay afloat. Including property owners who have seen unprecedented declines in rent collection and suffering serious cash-flow issues. The number of corporate bankruptcies is increasing and will continue to climb as the economy attempts to reopen.
A recent survey of small business owners indicated that nearly half of think they will eventually have to close their business for good. Forty-one percent of the small business owners surveyed said they are looking for full-time work elsewhere. This is on top of the small businesses that have already closed to never reopen. The economy will struggle to recover since it was not in good shape prior to the pandemic.
Many analyst think that the damage that’s been done by the government lockdown will have long-term consequences, the government spending and debt won’t go away. The lockdown may have helped flatten the curve but the virus is still out there and authorities have destroyed the economy. The government’s solution to the consequences of the quarantine has become part of the problem.
Local tax revenues are based on sales taxes, income taxes, business license fees, and property taxes. At this time the sales, income and business license fees have already plunged throwing local and state governments budgets into disarray. If cities and counties respond to the drop in tax revenues by increasing property taxes it will hasten the collapse of businesses. The hit to local tax revenues is permanent. On-line sellers don’t pay local taxes. Most small businesses have supported local tax revenues are services: bars, cafes, restaurants, etc. As businesses close for good, the likelihood of new businesses taking on the same high costs (rent, fees, labor, and overhead) is near-zero.
What’s the value of vacant commercial space? If the demand is near-zero, the value is near-zero. At some point valuations will adjust down to reality and property taxes collected will slide down accordingly.
The core problem is the U.S. economy has been fully financialized and operating costs are unaffordable. The commercial property owner overpaid for the properties with cheap borrowed money and now the owners must collect high rents or they cannot make the mortgage and property tax payments.