Sales tax slowdowns

By Fester:

Via Calculated Risk is the first wave of some bad news for municipal and state government finance junkies.  Revenues are coming in below expectations which will necessitate pro-cyclical adjustments to state budgets when counter-cyclical changes (increases in spending) are the appropriate Keynesian response.

From the Rockefeller Institute of Government: Sales Tax Collections Decline in Most States, Rockefeller Institute Survey Finds

State sales tax revenues delivered the weakest performance in six years during the first quarter of 2008, while growth in overall state tax revenues continued to deteriorate, according to preliminary data in a new report by the Rockefeller Institute of Government.

With 36 of the 45 states that collect sales tax reporting, revenue from sales taxes declined both nationwide and in 21 states during January to March 2008, compared to the same period a year earlier. Southeastern states were hit the hardest: nine of the 21 states reporting sales tax declines were in that region. When adjusted for inflation, sales tax revenues declined in at least 27 states. For the states reporting so far, the overall level of sales tax collections fell slightly – the first time such revenues have not grown in six years.

The recent GDP report is showing slow growth in consumer spending, so on first blush, one would think that sales tax growth would be positive although slow.  However there are a couple of interesting things in the GDP report.  The first is that the purchases of tangible goods decreased over the last quarter, and that a good deal of the growth in goods and services purchased were from imputed/calculated transactions such as the cash value of the rent owners pay themselves to live in their house.  Secondly, the areas that saw significant growth were energy and health care.

States don't/can't tax imputed gains in value until they are realized by either a mark to model system such as property tax re-assessment or a mark to market system.  Furthermore, most states do not tax food, clothing, health care and energy at all or at the same rate as other goods.  We have seen significant price increases in food, health care and energy but since these are protected goods from the sales tax, there is no revenue growth there.  Instead since there is a general income stagnation or decline, the budget constraints of most consumers and the pricing profile of goods means people are shifting their consumption from taxable goods and services to non-taxable goods and services. 

Comments

[Dave Schuler]

I've been predicting that state and local governments would be among the early casualties of the end of the housing bubble and your points about sales tax support the notion. The greater the degree to which people have been using home equity lines of credit for consumer spending over the last few years the worse the problem will be.

Here in Illinois the fiscal situation is particularly serious. The state didn't economize when it should have and the imprudent actions of the governor have left the state in a condition in which its need for larger future levels of operating revenue have increased.

As you know state and local government tend to be highly dependent on property taxes and sales taxes. Both of them tanking at the same time probably isn't good news.

[fester]

Dave --- I completely agree with you and have been blogging on the overdependence of a temporary bubble in real estate transaction taxes for local revenue growth for a couple of years now. I think we have gone back and forth in mutual admiration on that a couple of times :)

Another part of the problem is a political economy/rule set problem in that maintaining a rainy day fund is politically very costly in good times (return the money to the taxpayers as a rallying cry) and most local governments are prohibited from running operating deficits by either state constitutions or state laws. So no cushion and a hard budget constraint encourages splurge and purge bulimic budgeting... I need to think more on this one.

[Dave Schuler]

Yeah, that's why I think that the states, rather than stashing the dough they were bringing in in the late 90's into a rainy day fund, should have invested in automation. They could've substantially lowered their operating costs and, consequently, their need for regular revenue.

Instead many succumbed to the bureacrat's temptation of hiring additional staff when revenues increase. That's really the worst time to do it. Counterintuitively, when you've got extra revenue is the right time to economize. You can afford to do it.

[fester]

Yeah --- automation levels equivilant to that I saw at my university in 2000 would be a very nice thing to see at state/local government... excuse me as I cry in the corner...

I think we have a mismatch of incentives and agency as the people who decide where to spend money have the incentive to go to payroll rather than capital spending as that builds patronage networks.....