Where a municipality’s sales tax rate was reduced in the base year for revenue calculation (leading to understated revenue loss), could an adjustment be made to compensate for the change in sales tax?

The U.S. Department of the Treasury’s (“Treasury”) Final Rule requires municipalities to accommodate for changes in tax policy adopted on or after January 6, 2022:[1]

Treasury is providing in the final rule that changes in general revenue that are caused by tax cuts adopted after the date of adoption of the final rule (January 6, 2022) will not be treated as due to the public health emergency, and the estimated fiscal impact of such tax cuts must be added to the calculation of “actual revenue” for purposes of calculation dates that occur on or after April 1, 2022.[2]

Treasury does not specifically address retroactively calculating the impact of past tax policy changes on revenue loss, specifically those enacted before January 6, 2022, or for calculation dates before April 1, 2022. However, Treasury anticipates updating its Frequently Asked Questions (“FAQs”) to address relevant questions arising from the Final Rule.[3]

As it stands, municipalities should not retroactively adjust base year revenue to remove the impact of tax policy changes enacted before January 6, 2022. Municipalities should follow the guidelines listed in the Final Rule, which do not include adjusting for tax policy changes in base year revenue. Municipalities should remain on the lookout for updated FAQs from Treasury regarding guidance issued in the Final Rule. In the meantime, municipalities can ask Treasury to address questions such as this one by emailing SLFRP [at] treasury.gov (SLFRP[at]treasury[dot]gov).

To provide greater flexibility in the use of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”), the Final Rule provides recipients with a second way to access revenue replacement funds, creating:

an option for recipients to use a standard allowance for revenue loss. Specifically, in the final rule, recipients will be permitted to elect a fixed amount of loss that can then be used to fund government services. This fixed amount, referred to as the "standard allowance," is set at $10 million total for the entire period of performance. Although Treasury anticipates that this standard allowance will be most helpful to smaller local governments and Tribal governments, any recipient can use this standard allowance instead of calculating revenue loss pursuant to the formula above, so long as recipients employ a consistent methodology across the period of performance (i.e., choose either the standard allowance or the regular formula). Treasury intends to amend its reporting forms to provide a mechanism for recipients to make a one-time, irrevocable election to utilize either the revenue loss formula or the standard allowance.[4]

It is crucial to note that Treasury also states that recipients “must choose one of the two options and cannot switch between these approaches after an election is made.”[5] Treasury has also clarified that the standard allowance is up to $10 million, and it cannot exceed a municipality’s total CLSFRF award amount.[6]