Update on Local Sales Taxes

Since the pandemic started shutting down economic activities that are subject to sales tax, governments have been bracing themselves for a hit to their 2020 operating budgets.

Some sales taxable activities, such as retail and construction, are getting back to normal levels after the pandemic dip. Others, such as entertainment and hospitality, are still struggling to get traction. Although we cannot know yet what is happening with each taxable sector, we do get a read on the total amount of sales tax revenue distributed to jurisdictions, with a two month lag. So, we now can see the total sales tax impacts of the pandemic shutdown through May.

For all taxing jurisdictions in King County, sales tax distributions for the first five months of 2020 are about 11 percent below the first five months of 2019. But the average is hardly indicative of what is going on in any one jurisdiction. Figure 1 shows the change in sales tax disbursements to the ten largest recipients of the tax for the first five months of 2020 versus the first five months of 2019.

As noted in a previous article, sales tax applies to many activities other than retail stores. For example, construction on the Microsoft campus likely caused some of the upward bump in sales tax collections for Redmond. With travel curtailed, SeaTac saw a huge drop in sales around the airport. Tukwila has a very large presence of brick and mortar retail in the Southcenter area, much of which would have been shut down.

Are we recovering? Figure 2 shows the year-over-year change in sales tax receipts for the same ten cities for the month of May.

Here we see growth in some jurisdictions over May of last year, as consumers started to catch up on spending. National retail data shows jumps in June and July, so we should expect some further improvement from the retail sector in the coming months.

Looking Ahead

The story that is unfolding across the consumer economy is one of substitution. Most households still have lots of money to spend, but they are spending it in different ways. One major change that will have an impact on sales tax receipts grows out of the huge increase in online sales. Under the state’s destination-based sales tax system, the local sales tax for online sales is remitted to the jurisdiction where the product is delivered. So the sales tax paid by online shoppers will go to the city where they live, which may or may not be the city where they normally shop in person. Smaller cities with limited retail will benefit from this.

The taxable leisure-entertainment-hospitality sector remains well below normal, and even as it recovers there will not be as much catch-up as there has been with hard goods. Consumers will buy the socks and cars they put off replacing during the shutdown, but they will not have twice as many lattes or see twice as many movies.