States Facing Impediments to Projected Increases to Growth of Sales Tax Revenues

State and local tax revenues have continued to grow, but as the business cycle matures, revenue growth has been slowing. One indicator of slowing tax revenue growth has been the downward trend in sales tax revenue growth. In FY ’15 total state sales taxes grew by 4.6%, but in FY ’16 that growth fell to 1.5%. Based on an analysis by the Rockefeller Institute of Government, states had expected a rebound in FY ’17 sales tax revenues, with a median projected increase of 3.1%. While there is some variation in actual collections between the states, sales tax collections this year have been disappointing. In California, for example, YTD state sales tax revenues had been expected to increase by 4.6%, but FY ’17 sales tax collections have been flat, having grown by only 0.1% over YTD FY ’16 collections.

Even in states that may be more dependent on income taxes, sales taxes are a key component of state tax revenues as they help diversify a state’s revenue sources. They are even more important in no-income tax states such as Florida, Texas and Washington where they represent the largest General Fund revenue source. There has been some hope that state sales tax growth will improve in FY ’18, but the outlook is mixed right now. States have been a bit more optimistic in their expectations, as the median estimate of FY ’18 sales tax growth has increased to 3.5% from the 3.1% forecast for FY ’17. Retail sales and consumer spending, however, have been lackluster so far in 2017, even as the start of FY ’18 approaches. Consumer spending was flat in the first quarter of the year, but there are hopes for a spending rebound in Q2 that will carry over into the new fiscal year. April retail sales came in below expectations with a 0.4% increase, but February and March sales estimates were revised upward, and there are expectations that Q2 spending will increase to 3%. 

Spending could be helped by a federal stimulus combining lower tax rates and new infrastructure initiatives coming out of Washington DC, but those policies may be delayed given other legislative and political priorities. We will continue to track the development of federal policies that could help offset factors that the Wall Street Journal described as impediments to the growth of consumer spending: increasingly uneven distribution of wealth, as well as lower levels of consumer debt that have offset another driver of consumer spending, wage growth.

Sources:  California State Controller, Morgan Stanley, Rockefeller Institute of Government, Wall Street Journal