Governor’s Sales Tax Proposal: A Trojan Horse?

by on December 1, 2008 · 0 comments

in Economy

By J. E. Christensen

The National Retail Federation reports that consumer spending during the Thanksgiving Holiday weekend was up 7%. This should spell relief for state and local government who depend on sales tax revenues to provide local services like Police, fire, parks, libraries, schools. But look a little deeper in the report to see why local governments are not breathing easier.

For more than a century public services have been paid for using a tax on consumer transactions. But since the advent of the internet companies with no stores (bricks) in a particular state are exempt from charging a sales tax. Think of the last time you visited an store in your local mall. And while overall consumer spending limps along at an anemic 2% combined growth, it’s clear that the retail ‘clicks’ are growing at the expense of the retail ‘bricks’; and the idea of a tax on consumption is challenged.

Retail often lives on a margin of 10% or less. A two percent decline in 2008 is credited with putting major retail chains like Mervyn’s out of business. In a tightening market that is now officially declared a recession since December, 2007, retailer and consumers will take a 8 or 9% price cut if they can. What’s that mean for the future of sales tax revenues? The Governor and legislature is seriously considering increasing the sales tax rate and expanding the tax into new areas. As long as the internet has the advantage, expanding the tax and increasing the rate may do more harm than good.

While the average amount spent over the weekend is up 7%, the volume of people shopping online is up 18%. Cyber retailers expect a 15% growth in sales while economists forecast a total increase of 2% or less. I don’t need another study to tell me that consumers are moving to the internet. After all, now be honest, have you seen an item at a brick store, gone home and found it for less on the internet? I have. I particularly target expensive items like camcorders; buying an $800 item from Amazon will save you over $60, and delivery is free. Retailers may be reading the tea leaves since 84% of the brick retailers scheduled cyber promotions on Monday.

According to the Legislative Analyst Office remote (cyber) transactions cost the state $1.1 Billion in 2006. But the economic status of most of the country has tightened considerably since 2006. Consumers are looking for ways to save money. In all likelihood the growth in internet transactions is accelerating. Based on reported cyber growth, the $1.1 billion is about $1.6 billion today. But the bad news doesn’t stop with declining sales tax revenues.

More sales over the internet means fewer sales in bricks; bricks close, commercial property values fall, schools and local governments lose property tax revenues in addition to the sales tax revenues. In the mean time, a smart retailer moves a warehouse to empty desert or Mexico, using space that costs a tenth of the cost of retail space in the city. That retailer will stay in business and make money. I pity the owners of shopping malls and any brick retailer locked into a lease longer than two more years.

Before the Governor and the Legislature make a decision on the sales tax they need to address the tough issue; the question of taxing consumption. Our current policies promise to drive more consumption from bricks to clicks. Sales tax is rapidly becoming a tax, not on consumption, but on the consumption method. Change the method, don’t pay the tax. Circumstances compel us to look at the problem for what it is, not what we wish it to be. In the absence of corrective action, increasing the sales tax will likely do more harm than good.

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