Stagnant tax policies and anti-tax fervor coupled with the Legislature’s inattention to changing business patterns will play havoc with local government financing over the coming years.
Here’s the backdrop.
Municipal finances depend heavily on sales taxes that the state collects and shares with communities where the sales occur. Growing online sales by Amazon, Wal-Mart, and other major retailers take sales away from local stores. And even though Wal-Mart and other retailers with physical presences in the state collect taxes for online sales, the state defines these as “use” taxes and does not share them with municipalities.
From FY 2011 through FY 2016, sales tax diversions to municipalities grew an average of 3.1% each year. However, from FY 2016 through FY 2017, total diversions hardly increased, up just 0.4%. At the same time, in the first quarter of 2017, Wal-Mart online sales jumped 63%. For the first five months of FY 2018, total diversions increased just 0.3%, while Amazon sales surged, growing to 43% of the e-commerce market.
Legislators’ lack of interest in giving municipalities a share of use taxes was evident at the start of the new legislative session. On session’s second day, the House Ways and Means Committee approved a bill that would spend use taxes collected from companies like Amazon on road and bridge repairs.
Reflect on this for a moment.
The expert from the conservative Tax Foundation brought in by legislative leaders to provide guidance on “tax reform,” told legislators costs for road and bridge building and maintenance should be paid for with fuel taxes, i.e., those who use roads and bridges should pay for them. Short-sighted anti-tax fervor has so far killed all efforts to boost fuel taxes, leaving browbeaten legislators no choice but to rob other funds for much needed road and bridge repairs.
Sigh. There’s more.
Surging online sales are also beginning to impact city and county property taxes as more and more retail outlets close. This is a double whammy for municipalities as they lose both sales and property taxes. Fung Global Retail & Technology tracks retail store openings and closings. In 2017, it reported 6,985 store closures nationally, up 229% from the prior year. Recent closures impacting Mississippi include Bed, Bath and Beyond, Sears, JC Penney, Payless, Winn-Dixie, Kroger, and Gander Mountain. Even Wal-Mart is closing stores as online sales increase.
Analysts expect much worse. Bloomberg linked the impact of growing online sales on brick and mortar retailers with increasing retail bankruptcies and problems with store credit cards to forecast a “retail apocalypse.” Credit Suisse forecast “a wave” of retail store closings and bankruptcies in early 2018. Those are pretty bleak forecasts given that store closings in 2017 almost surpassed the all-time high from the 2008 financial crisis.
Of course, billionaire investor Warren Buffett anticipated this trend in online sales and cut his investments in brick and mortar retailers. We can’t expect state government to be as savvy about the future as Buffett, but we should expect them to catch on when the writing is on the wall.
Fast changing business patterns have dire implications for traditional local government financing. Stagnant tax policies, which are totally under control of state legislators, need to be modernized and reformed with regard to local government.