By Jim Cline and Kate Kremer
In the last couple of articles in this series, we discussed the state of local government revenues and their potential impact on negotiations. In this article, we discuss how the differences between the structure of local economies can impact negotiations. We also discuss some significant shifts in revenue distribution that have occurred in recent years, especially since the pandemic.
As we study these statewide numbers, we see how the tax situation can vary from one jurisdiction to another, often related to their local economies. But it’s also important to understand that there are fundamental differences between city and county sales tax revenues. Counties often have large sections of unincorporated population with few commercial activities. Cities, on the other hand, are often the hub of commercial activities. This directly impacts receipts.
Most counties are heavily reliant on property taxes principally because they don’t receive large amounts of sales tax revenues. On the other hand, cities tend to be much more reliant on sales taxes, because that’s where the commercial activity takes place. There have been changes to the statewide distribution of sales tax revenues which provide 15% of these revenues to counties. This is an effort to strengthen the fiscal condition of counties. Let’s say the city of Renton generates $100 million in sales tax money under law Z. Renton gets to keep $85 million of that, and $15 million goes to King County. It is the law across Washington state that 15% of city sales tax revenues go to the county.
But this portion of sales tax revenues directed to counties doesn’t change the fact that counties are heavily dependent on property taxes. This means that, all other things considered, counties are much more likely to be fiscally constrained, especially in a period of high inflation. Recall as we discussed before, property taxes tend not to keep up with inflation, especially in a period of high inflation. In a period of low inflation, counties may fare better.
There’s been another fundamental change in the economy labeled the “Amazon effect.” Sales taxes in Washington are imposed at the point of sale. In the traditional brick and mortar economy, that includes people going to the malls, or going to stores that were located inside the cities. What we see emerge in 2021 is a significant change in consumer buying patterns. Many more people are buying products online, and that sales tax revenue is distributed at the point of sale.
What does that mean in terms of tax distribution? Let’s take a clear-cut example. When we review the Normandy Park revenue numbers in 2021, we see a huge increase in their sales tax revenue. And you might ask, “what was happening in Normandy Park in 2021?” The Normandy Park economy, like other “bedroom communities,” is a suburban area with a lot of residential housing and very, very little commercial tax base. Why did they have a huge increase in sales tax revenue in 2021? It’s because people were sitting in front of their computers from home and ordering goods online. Critically, the point of sale in such transactions was Normandy Park, and the city of Normandy Park received the benefit of that shift in tax revenue.
But there’s no free lunch in this. Some of the cities that had large commercial areas suffered a small decline in their tax revenues because people were buying less from the brick-and-mortar stores and more from the online. Particularly cities with large malls like Tukwila or Auburn – or other cities that were regional commercial zones. There was a bit of a shift in how tax revenues were distributed. While traditional retail has reopened, online shopping seems here to stay, which has created a much different distribution of sales tax revenues from a year ago.
This change has helped counties to a certain extent. Residents living in unincorporated areas that had once travelled to shop in nearby cities can now order online, and that revenue goes directly to the county.
It is important to understand how these shifts might have impacted your city or county so that you can better consider the employer’s fiscal realities.
