Are sales taxes in a death spiral?

The latest Hub Sheet had an article discussing how property taxes have been rising very sharply, much faster than inflation. Rising property taxes are a frequent concern with homeowners, especially those that have paid off their house and are living on a fixed income. But there’s an interesting trend going along with it: sales tax revenues are beginning to crater, dropping from 32.33% of total state tax receipts in 2000 to 30.10% in 2013. Is this just a small blip on the radar or should states and cities get used to the idea that tax bases are going to have to make some long-term structural shifts?

Sales tax revenues compared to total state tax revenues. Data sourced from Tax Policy Center.

Sales tax revenues compared to total state tax revenues. Data sourced from Tax Policy Center.

As you can see, sales taxes have been growing much more slowly than total revenues and are composing a shrinking share of total state taxation. In fact, inflation-adjusted total state taxation between 2000 and 2013 increased 16%, but sales tax revenues increased only 8.2%, nearly half the rate and well below the population increase of 12.2%. This should be worrying to cities like Orem, Taylorsville, and West Valley City who have spent a lot of time, energy, and tax incentives to chase down the slow-growing pie.

The obvious culprit of an increased move to online shopping bears a lot of the blame. While those purchases are not legally exempt from sales taxes, almost no purchasers will remit those taxes on their own. Despite Amazon’s efforts to collect and remit sales taxes on behalf of their customers in a handful of states, that’s unlikely to change anytime soon. It’s easier for a behemoth like Amazon to implement the complex systems needed to calculate and remit a variety of state, county, city, and special district sales taxes, but smaller businesses would be crushed by having to work with that level of compliance. It’s almost a sure bet that attempting to capture the sales taxes owed isn’t going to happen anytime soon.

This brings us back to property tax increases. While total state revenues have grown in excess of inflation and population growth, sales tax revenues have been lagging behind. Since most cities have limited options for other use and excise taxes (and almost universally no options for income taxes), there’s going to be a necessary shift of the burden to property taxes. Maybe instead of trying to chase down a shrinking piece of the retail pie cities should be trying to encourage a broader base for property taxes.

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