By Jim Cline
If you are in or soon entering bargaining, right now it is critical to tracking economic developments and also reviewing the month to month sales tax numbers, in a way that it has never been before. If you are in or soon to be in contract bargaining, expect that the budget and the general state of the economy will loom large as points of discussion.
The latest report from the State Economic and Revenue Forecast Council offers a moderate glimmer of hope that the economy is now heading in the right direction. It summarizes the current situation:
The Washington economy continues to recover from the recession but growth is slowing. As of October, the state’s economy has recovered nearly half the jobs lost in March, April, and May but employment growth has slowed. Washington’s unemployment rate declined to 6.0% in October, down significantly from the 16.3% rate reached in April. Washington housing construction improved to 43,700 units in the third quarter from 40,300 units in the second quarter. Washington exports continue to decline, mostly because of transportation equipment. Washington GDP declined 7.7% from the peak compared to 10.1% for the U.S. Seattle consumer price inflation exceeded the national average in October.
In a previous issue, we discussed the dramatic drop in sales tax revenues during the first half of the year but that the drop was not nearly as sharp as many local budget officers have been projecting. And even better news: The latest numbers going through Q3 (July-September) show a rebound in sales tax revenue.
But that rebound is not uniform and many jurisdictions still face steep revenue reductions. Where’s the variation and what’s driving it? Among taxing jurisdictions, it seems to be a case that the “rich” have been flattened and the “poor” have been lifted. Jurisdictions that had generally limited commercial districts like counties and “bedroom community” cities have actually seen an increase. Most cities have seen a reduction in sales tax revenues and those with large malls and shopping districts have seen dramatic reductions. Jurisdictions with big box stores like Costco that continue to be open have been able to tread water.
Among the beneficiaries of this dislocation, as indicated, are rural counties (e.g. Adams County) and bedroom cities (e.g. Normandy Park, Shoreline) that have limited commercial tax bases. Why? It’s called the “Amazon effect.” The reduction in in-person shopping has been at least partially offset by an increase in online shopping. That’s caused a redistribution of sales tax revenues. Point of delivery sales taxes means that there’s been a transfer of sales tax revenues to those jurisdictions historically less reliant on sales tax revenues. Note that this is a limited time impact that will pad reserves but is likely to evaporate following a return to normal shopping patterns. It’s not a stream of revenue that can be relied upon.
Across the state, revenues are both up and down across jurisdictions but statewide they are flat for the most recent quarter. Following a steep Q2 decline, Statewide Q3 (versus Q3 2019) revenues are off only slightly — .35%. (The Q2 drop was 8%.) A month to month review of Q3 shows some improvement over time with a reduction in July statewide numbers followed by an increase in August and September.
It’s also important to put this data into perspective as to the broader array of local government revenues. Sales tax revenues are a major source of revenue for most cities, and many counties, but especially rural counties. Cities without a commercial hub, are typically much more dependent on Property Taxes and other revenues. While there have been some predictions of property tax declines, we are not expecting those revenues to be off much more impacted by a delay in a collection than an actual reduction.
We’ve already seen some wildly inaccurate budget office reports, so it’s important to do your own homework. To be fair, most budget officers are making projections in very uncertain times. Planning for 2021 budgets, which is well underway, is made tougher by the level of uncertainty over the direction of sales tax revenues.
We will continue to follow economic and sales tax trends through this year and into next on a more immediate month to month basis and will keep you informed on those changes. We’ll offer an upcoming discussion about how the economy and tax revenues fit into the broader set of issues you’ll face during negotiations.
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