Pathway to Recovery® Series
Sales Tax Revenue Projections
If there ever was a year with unexpected twists and turns, 2020 wins the prize! In my mind, all economic forecasts (mine included), from last year and into the first quarter of 2020, were way off base and found to be out of whack. I suspect that will continue into 2021 as well.
One interesting forecast has been on the topic of sales-tax revenue. While the picture was rosy coming out of strong 2019 retail sales, the outlook took an ugly twist, given the economic shutdowns necessitated by the COVID-19 pandemic.
Across the board, all sales-tax projections turned upside down, with average revenue projections off by 30% or more, year over year. During the pandemic’s first wave—with so much of the country in a lockdown—many pundits assumed consumer spending would come to a halt as malls and shopping centers became ghost towns.
To a large extent, that’s what happened.
That, however, is an oversimplification and not the full picture. Here are just a few of the trends that developed over the last six months:
- Curbside dining became a new fad and boom in the restaurant industry. While inside dining is most preferred, the staff level and profitability of curbside dining exceeded expectations. This will be a trend that will only grow going forward, as it may be a long time before a sufficient number of Americans are vaccinated against COVID-19.
- Similarly, home delivery of restaurant-prepared meals, groceries, and other goods took off, as people avoided going inside so many establishments.
- Home renovations went through the roof—literally. While staying home to protect against the coronavirus, homeowners realized the number of projects they could do on their own or what needed to be done when contractors became available. All types of home improvement products escalated in price and in sales, leading to unexpected strong sales-tax revenue from June 2020 on.
- Internet sales rose significantly during the months of March through June. As individuals stayed home and spent far more time on their computers, they often drifted over to Amazon and other sites and made purchases by the boatload. The number of packages being left at front doors nationwide was staggering.
- Pent-up demand is already leading to a pickup in retail sales at shopping centers and malls and strong holiday retail sales are expected. This effort is being led by the big box stores in particular. This should carry over well into 2021.
- While air travel and cruise vacations are down significantly, hotels are seeing a lift as are auto repair and family-car travel. With more people on the road again, we’ve seen a rebound in gas-sales-tax levels.
These trends are showing positive signs that a recovery is underway. How strong the recovery will be is yet to be determined, but the outlook for sales-tax revenue is looking brighter for the fourth quarter and the year ahead. This should come as good news in determining next year’s budget.
While I think it may take a couple of years to exceed pre-pandemic sales-tax levels, the worst-case scenarios seem less likely. What might have been a projected 25% annual cut, year over year, will more likely be 10% or less in 2021.