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As COVID-19 drains local tax revenue, streaming taxes could gain steam

States across the country have seen their tax revenues drop fast amid the COVID-19 pandemic, and one tax policy expert says it is likely that more state and local governments will pursue taxes on streaming services to help make up lost revenue.

With an economic downturn and the loss of both live events and retail foot traffic, states across the country have seen the loss of reliable, consistent tax revenue. Additionally, the cord-cutting trend for traditional cable television has continued as people look to trim costs, reducing the franchise fees cable operators pay to localities in exchange for using public property. With traditional revenue sources suffering, finding new revenue opportunities is quickly becoming imperative.

"Declines in sales tax revenues have been fast, steep, and widespread across the states. April collections, mostly reflecting March sales, fell 16 percent in the 42 states for which we have complete data," wrote Lucy Dadayan, senior research associate at the Urban-Brookings Tax Policy Center, in a June 1 blog post.

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In addition to this problem, many state and local governments have shown an inability to update their tax systems to keep pace with the evolving economy and incorporate services like streaming options, which has created some revenue gaps, said Richard Auxier, a research associate at the Urban-Brookings Tax Policy Center, in an email.

"Given the unprecedented and immediate first problem, I think most will take another look at the second problem," said Auxier.

Already, many states have moved to incorporate streaming services into their tax systems. In 2019, Auxier found that of the 45 states with a general sales tax, 33 states — along with the District of Columbia — include video streaming services in their sales tax base.

Additionally, he found that other states, such as Delaware, Connecticut and Florida, are taxing online video platforms through a different strategy.

Auxier believes many state and local governments that do not currently tax streaming services as part of their sales tax bases are likely to pursue streaming taxes as part of their sales tax bases in the near future, even as early as a few months from now. But he said we have not seen a big jump amid the pandemic because COVID-19 has kept some governments from doing a lot of legislative work. Also, governments are focused on directly addressing the pandemic for the time being.

Notably, new sales taxes on streaming services stand to offset some of the declines local governments are seeing in franchise fees from cable operators. Rules from the U.S. Federal Communications Commission allow municipalities to collect up to 5% of gross revenues from cable operations in a given area.

Consumers have been cutting the cord on traditional multichannel television for years, with the primary factor being affordability. April 2020 research from Kagan, a media research group within S&P Global Market Intelligence, projects that the trend will accelerate over the next five years and that streaming services will become increasingly popular.

Kagan analyst Tony Lenoir said in an interview that the COVID-19 pandemic and its economic aftermath will magnify existing trends.

"They're not going to spawn new trends," he said. "The trends are in place — they're just going to accelerate them."

Kagan projects that total traditional multichannel households will drop from 80 million in 2019 to 48.5 million in 2024. The research projects a large jump in online-video-only households over the same period, from 18.6 million in 2019 to 41.5 million in 2024.

Kagan expects that virtual multichannel households coupled with online-video-only households will surpass traditional multichannel households.

Lenoir noted that in the last economic downturn, consumers did not have a wide variety of more affordable entertainment alternatives. Today, the streaming market is highly competitive with affordable options.

"With U.S. households under budget constraints, now that they have much more affordable home video entertainment alternatives, when they make those budget decisions, it just makes sense to just get rid of multichannel," he said.

Kagan also found in a recent U.S. media consumer survey that as a result of COVID-19, consumers are more likely to resubscribe to an online video service that they previously canceled, rather than resubscribe or sign up for a traditional television service from a cable, satellite or telephone company.

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