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Sep 07

Sales Tax Distribution Report & Advice

Posted on September 7, 2016 at 5:47 PM by Paige Worsham


September 2016

July 2016 Collections – September 2016 Distributions


This month the Department of Revenue will forward to NC Counties $281.24 million in sales tax revenues from July sales. This is an increase of $29.67 million over the previous month, and $19.76 million over the same month last year. This is good news after last month’s weaker report.

As you will note from the attached distribution report, the 2015 local option sales tax law changes appear for the first time. This allocation appears under the column heading “Art 44*524” to reference the statutory authorization.

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Based on data provided in the Federal Reserve Bank of Richmond’s Snapshots publication, this could potentially be the result of improved economic conditions in July 2016. For the first time in some time, North Carolina’s unemployment rate was lower than the nation as a whole (4.7% NC and 4.9% US). Moreover, initial unemployment claims were down by 5.98 percent when compared to June, and more than 20% since last July. Sectors boasting the largest payroll increases, year over year, were professional and business services (4.8%) and construction (4.4%). Manufacturing and information services both saw a year over year decline during the same period.

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There was also significant expansion in real estate in July. North Carolina saw a 13.67% increase in total private building permits since June 2016. And a 19.88% increase year over year. These compare very favorably to national numbers, which were negative in terms of both month over month and year over year. Most of the new permit activity was in the Charlotte MSA. However, according to CoreLogic, “home values in North Carolina appreciated 0.8% in June and 4.9% since June 2015. House prices grew in June in every MSA except Durham and Winston-Salem; on a year over year basis, every MSA except Fayetteville and Greenville reported house price growth.” Housing starts also increased substantially, more than 40% since July of last year. This compares very favorably to a 5.58% growth rate nationally during the same period. The actual number of NC housing starts is comparable to what we experienced back in mid-2007.

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Of course this is a big change from what we have experienced in the first half of the year. So what contributed to the earlier drag, and what should we expect going forward? 

According to Wells Fargo Senior Economist Eugenio Aleman, inventories were a significant cause of first and second quarter 2016 weakness. In fact they have been a problem for the last five quarters. Recently, inventories were at levels not previously seen since 1957. On the flip side, that inventory drag is not expected to continue into the 3rd and 4th quarter numbers, which should start freeing up economic growth for the remainder of 2016. This may be a part of the explanation for slightly better numbers for July 2016 sales, and may be a sign of better sales tax revenues for the balance of the year, although that is not yet clear.

Another significant factor going forward will be consumer spending. Nationally consumers make up two-thirds of the economy. This is fortunate as consumer spending has been growing at a very strong 4.2%. In the third and fourth quarters, Wells Fargo expects this spending to continue to grow, but at a much reduced rate of 2.7%.

Generally economists are calling for continued slow growth in the third and fourth quarters of 2016. As the graph below suggests, the Atlanta Federal Reserve’s GDPNow estimate is forecasting real GDP growth of 3.5% for the 3rd quarter.

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Others are looking toward a 2.0 – 2.5% growth rate for the remainder of the year. While things have been more positive, several economists still believe that uncertainty around the election and potential interest rate changes, as well as the length and current weakness of the current expansion, may suggest a small recession in the first part of 2017.


On a final note, we thought this graph from Fidelity might be of interest. It shows, on a national level, state and local tax revenue growth from 2006 to the present. It may be instructive to compare this to your own county experiences.                                                                         
 

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