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May 05

Sales Tax Distribution Report & Advice

Posted on May 5, 2017 at 2:13 PM by Paige Worsham

May 2017
March 2017 Collections - May 2017 Distributions
Linda S. Millsaps

Current estimates are that the NCDOR will distribute $234.8 million in sales tax revenues to our counties and cities. This represents an increase of $16.4 million over the previous month and a $20 million increase from the same month last year.


And once again, when Articles 43 and 46 are excluded (as these are not utilized in all 100 counties), the pattern remains essentially the same.


The good news is that this is the second month in a row that we have seen above average growth.

In general, all economic indicators continue to point to slow but steady growth, although potentially a little slower than some originally predicted.

                                              Looking forward and 2017-18 Budgeting

Mike Walden of NC State indicates that at both the state and national level, growth is continuing, but at a slower rate. His index of NC Leading Economic Indicators shows a drop-off of 0.4%. This was driven primarily by a decline in manufacturing hours worked and an increase in unemployment claims. However, this is still 4.3% above the same time last year. This index can be especially helpful for sales tax forecasting, as it suggests the economic direction of the next four to six months.


The Carolinas Survey of Business Activity shows that our leading private sector firms continue to be moderately upbeat about the economy and its future. Their survey responses indicate a notable improvement in sales and general business conditions overall. Looking ahead, these same leaders remain positive about the future, but have a far less rosy view than they had in February, and a moderately less positive view than they did in March. They do continue to have a decidedly negative view of the availability of employees with the skills they need.


The skills – to -- job mismatch in North Carolina is clearly reflected in the recently updated Occupational Employment Statistics data. According to this information, over the past decade, job prospects for high school educated workers are “more heavily skewed toward food service and personal care,” while “better paying production and construction jobs have become scarce” (North Carolina Labor Market Update: March 2017). By contrast, the fasting growing occupation groups were business and financial operations and computer and mathematics. These knowledge workers earn between 90% and 100% more than the average North Carolina job. A clear sign of the significant demand for this type of employee.

One category that has pulled the numbers up this spring is construction. As the graph from Federal Reserve Bank of Richmond indicates, the number of building permits issued continues to rise. The most recent data from March indicates that residential permits are up 42.42% over the same time last year. The number of new home starts is also up dramatically.


Another bright spot pulling the economy upward is consumer confidence. At the end of March consumer confidence was at its highest level in more than a year. In fact, the last time confidence was at this level was in April of 2015.


Fortunately for local governments consumer confidence for some time has been driving both the economy and local tax collections. As the data below shows, national retail and food service numbers continue to be extremely high. However, they have dipped some in the last few months.


                       So what does all this mean for your local economy and sales taxes?

Overall local economies with a large number of skilled professionals, and those with strong development, will benefit substantially over the next year. Over time the higher end labor market will continue to tighten, which will lead to strong, stable salaries. This, combined with strong consumer confidence, will lead to positive growth. Counties that have a large number of high school graduates in their labor mix could struggle.

Currently the economy and our local sales taxes are heavily reliant on strong consumer confidence. For several months now, consumer confidence has been more buoyant than the hard data (wages, employment) suggest it should be. Careful attention should be given to this indicator for any signs of weakening, as it will likely have a disproportionate impact on the economy. And on sales taxes.

Given all these factors, and the slow but continuing policy movement in Washington, we would suggest a statewide sales growth rate of 4.0 – 4.25%. This estimate assumes several things. One, the vast majority of additional revenue growth from the sales tax base expansion is now “baked in.” As such, no additional new revenues are anticipated, and the base against which we measure growth has expanded. Second, it assumes no significant global events will substantially impact the country’s economy. As noted, this is a statewide estimate, so local circumstances may adjust the rate. And finally, it assumes that political forces in Washington will continue to move forward with some tax and economic changes, but at a slower pace than originally anticipated. Because the federal budget is now set until the fall, few large shifts are expected to impact our budgets until potentially 2018.

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