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Presentation examines unpredictable nature of sales tax revenue

Tuesday, August 28, 2007 | 9:43 p.m. CDT; updated 12:56 p.m. CDT, Monday, July 21, 2008

The impact of e-commerce, inflation, changes in individual spending habits and Boone County’s status as a regional trade center all affect the county’s most important and lucrative revenue source: sales tax.

As county officials prepare to develop a budget for 2008 during a tight fiscal period, it’s essential that they understand those factors, Boone County Auditor June Pitchford said.

Judith Stallmann, who recently analyzed sales tax trends for the county, presented her findings to the Boone County Commission and other officials Monday morning. Stallmann is a professor of agricultural economics and rural sociology who works with Community Development Extension and the Truman School of Public Affairs at MU.

“Sales taxes are very volatile as a revenue source,” Stallmann said after her presentation.

Pitchford noted that the county relies heavily on sales tax. Its half-cent sales taxes, one for general operations and the other for roads and bridges, generated $11.5 million apiece in fiscal 2006, for example.

“Sales tax is almost 70 percent of our total revenue, so it is an extremely important revenue source for our county,” Pitchford said Monday. “As we finalize budget projections, we will be reflecting on some of the high points of today’s discussion.”

The impact of e-commerce on sales tax is perhaps the most difficult factor to quantify, Stallmann said, but it’s clear that Internet sales are taking a toll on local sales tax collections.

“We have all suspected for some time that it is a drain, and a hole in the tax base, and the presentation just confirmed that,” Pitchford said.

Nationally, business-to-business Internet sales total about $1.3 trillion per year, while business-to-consumer sales total about $93 billion, Stallmann said. While some of those sales are taxable, many are not. Stallmann noted, for example, Amazon.com, a huge online retailer, may pay no taxes in Missouri because it is based out of state. Stallmann also said that many people are now choosing to buy automobiles online because they can save on taxes and get multiple dealers to bid against each other.

Since e-commerce is a newer trend, data only traces back to 1997, Stallmann said. She estimated in her presentation that potential e-mail commerce per Boone County resident could reach about $288. But she noted that the estimate could be low because Internet purchases are affected by income, the percentage of youth population and connectivity to the Internet.

Inflation is another factor the county must keep in mind when projecting sales tax revenue. But inflation now is not out of control, Pitchford said, noting that inflation in Boone County is around 2 to 3 percent.

Gasoline and food are two key items affected by inflation, Stallmann said. Her report indicated that in January 1990 oil was selling for about $22 per barrel, but that price has since nearly tripled to about $73 per barrel. The cost of oil is also driving higher food prices, Stallmann said.

“Current inflation means that people are going to need to reallocate how they spend their money, and that is going to affect retail sales,” Stallmann said, noting that many people are spending less on retail and more on services.

Stallmann also addressed Boone County’s role as a regional trade center that draws consumers from surrounding counties. While she predicts that won’t change any time soon, she said it’s possible that future retail projects in surrounding counties could have an impact. If a Wal-Mart Supercenter were built in Boonville, for example, it would influence the number of shoppers who come to Columbia from Cooper and Howard counties.

Pitchford agreed with Stallmann that the county for the next couple of budget cycles can reliably assume that it will remain a regional trade center. Still, she said, it’s not safe to assume that sales tax collections will remain stable.

“Although we exceeded our 2006 budget for sales tax revenues, we fell short of what our final projections were for the year because of a very sharp downturn that emerged in the last part of the last quarter,” Pitchford said, adding that the county will probably also fall short in 2007, for many of the reasons Stallmann described. Pitchford said that, in turn, will create a tight budget for 2008.

In Boone County, Pitchford said, “we are so dependent on sales tax, we have to operate with very significant fund balances so we have a cushion” to work against a budgetary downturn. Strategies for dealing with that could include delaying routine equipment replacements that can be deferred without jeopardizing safety and putting a halt on expanding projects, Pitchford said.

“There are a lot of moving parts to this overall picture, which makes it difficult to understand what is going on at any one moment or predict what is happening in the next twelve months,” said Pitchford.


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