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Posted on April 11, 2016 at 11:09 AM by Paige Worsham
Unfortunately, unlike the previous month, this month’s distribution reflects a significant decline in local sales tax revenues. Overall local collections were down more than $81.4 million statewide in February. This downward movement returns us to collection levels slightly worse than last April collections. It is also unfortunate that the rate of decline more than cancels out the significant increase we saw last month, although that was primarily due to holiday shopping.
A glimpse of the state sales tax collection numbers suggest that this trend may be a part of a general slowing of sales tax revenues. In a recent presentation to the General Assembly, state economists indicated that sales tax growth at the state level has declined to about 2.8% in recent months. While the state will likely reach overall revenue targets, much of that will be due to growth in income taxes and not sales tax. However, all caution that this is not in any way a suggestion that sales taxes will not grow. Just that the growth is not as robust as hoped.
There could be several reasons for slightly slower growth. Employment numbers are one possible reason. According to the Federal Reserve Bank of Richmond, employment growth in North Carolina was essentially flat in February, with employers cutting a net 900 jobs statewide. During the month losses in the education, health services, construction and financial service industries were netted out against gains in professional services, business services, manufacturing and government. The good news is that on a year-over-year basis, most industries reported some growth, with the greatest percentage gains in professional services, business services, and construction.
A second set of possibilities relates to the overall national situation. The US Bureau of Economic Analysis (BEA) announced that, for February, personal income and disposable personal income increased nationally by 0.2%, while personal consumption increased a limited 0.1%. While these numbers are still in positive territory, they do suggest slow growth.
In looking ahead many economists are considering three factors: oil prices, stock market performance, and consumer confidence.
The graph below shows crude oil prices over the last five years. Today’s current price of $37.65 per barrel, while still significantly below the $115.98 at the height, is above the low we have experienced the past few months. This provides consumers with slightly less money to spend on other goods, including those subject to the sales tax.
Stock market performance overall has mostly been in a positive direction, although the growth has not been robust. On a year-to-date basis the Dow has increased 1.41%, the S&P is up 0.70%, and the NASDAQ is actually down 2.24%.
Another key factor is consumer confidence. Many economists think consumer spending makes up approximately 70% of the US economy. While some think that number is too high, what is clear is that consumer spending is very much a key component in sales tax revenues. And that consumer spending is driven in large part by that consumer’s confidence, or lack thereof, in the economy. On March 29th the Conference Board reported that “On balance, consumers do not foresee the economy gaining any significant momentum in the near-term, nor do they see it worsening.” This also leads most to support the theory of limited, but continued, growth.
The final item I wanted to share related to sales taxes is a visual of the level of both consumer confidence and small business confidence. As the graph below shows, these numbers generally trend together. However, in recent months the two have begun to diverge, with small business optimism falling well below consumer confidence.
Candidly I am not certain why this difference has started to surface. But, I thought you should be aware as many of our counties rely on local small businesses for their sales tax revenues.
In addition to the monthly data and analysis, you will be able to find additional revenue forecasting assistance from the N.C. Association of County Commissioners in a number of places.
1) 2015 Local Sales Tax Changes unit-by-unit analysis. This interactive spreadsheet offers county and municipal estimates of all the local sales tax changes passed by the 2015 session of the General Assembly. They include estimates of sales tax base expansion, as well as the impact of the 79 county allocations. It includes the ability to make your own assumptions about growth provided by base expansion, overall sales tax growth, and the $17.6 million state appropriation. This spreadsheet, as well as a brief PowerPoint to help explain the changes to commissioners, was sent via email from the Center for County Research and is available on the Association web site: http://www.ncacc.org/528/QA-on-Local-Sales-Tax-Distribution-Plan
2) 2016 Budget Resources. A number of charts previously seen in the “Fearless Forecast” were included on a jump drive being delivered to county managers as a part of the manager’s budget bag.
3) Upcoming Budget Webinar. In lieu of a Fearless Forecast document, we will be hosting a budgeting webinar mid-month. Look for more information on this in an email from the Center for County Research.