Local sales tax collections are way up; how the city and the county are planning for them are way different
photo by: Journal-World graphic
As one local government is poised to raise its property tax rate and another is set to pass a budget that requires dipping into $8 million of reserve and relief funds, here’s a piece of good news from a source that doesn’t always deliver that variety. The state of Kansas is reporting that both governments probably will get a lot more sales tax revenues this year than they once expected.
The Kansas Department of Revenue has released its July sales tax report, which mainly measures spending that happened in May. The numbers show consumers were in high gear. As expected, consumers spent much more this year than they did during May of 2020 when the economy was in the grip of the pandemic. Lawrence sales tax collections for the month were up 18.4% compared to the same period a year ago. Use tax collections, a special type of sales tax charged to online purchases, were up 16% compared to the same period a year ago.
But the numbers also show that consumers were spending far faster than they did in 2019, which was before the pandemic. May 2021 spending is about 7.3% higher than the pre-pandemic totals. In other words, retail spending has bounced back and then some — at least in the aggregate. Undoubtedly there are still some sectors of the economy that haven’t made up all lost spending.
But from a macro standpoint, the numbers are good. The result is that both Douglas County and the City of Lawrence are collecting more sales tax money than they budgeted to collect. Sales tax collections for Lawrence thus far in 2021 are 8.1% higher than they were during the same period a year ago. Use tax collections, thanks to a surge in online purchases, are up 23%. When you combine the two, total sales and use tax collections are up 11%. The city built its 2021 budget based on sales and use taxes growing about 5.5% over 2020 totals. In other words, the city is experiencing a growth rate that is about double what it budgeted for.
When you are dealing with tens of millions of dollars, that can add up to something. How much? If the year ends with the city’s sales and use tax collections up by 11%, the city will end up with about $1.5 million more than it budgeted to collect in its general fund.
The picture is similar for Douglas County. The County Commission built its 2021 budget on an assumption that sales tax revenues in 2021 would be about 6% less than 2020 amounts. Instead — with seven of the 12 monthly reports now in the books — Douglas County sales tax collections are 9.5% higher than they were during the same period in 2020. Put another way, the county is experiencing a growth rate that is 12.5 percentage points higher than what it expected.
That also can add up to some money. How much? About $1.1 million.
The windfalls at the city and the county share one characteristic: Neither one of them currently is planned to be used to reduce property tax rates for the 2022 budget. The county is proposing a property tax rate increase of about 1 mill, while the city is proposing to keep its property tax rate steady, which is only possible because the city is using reserve funds and federal relief dollars to balance the budget.
But there is also a big difference between the city’s situation and the county’s. The county, arguably, could fairly easily lower its proposed property tax rate increase to account for the projected $1.1 million windfall without having to change its spending plans.
The city is not in such a situation. In fact, the city is in a situation where it may actually fall short of some financial expectations despite the rapid growth of sales tax.
I’m going to try to keep this simple. County sales tax collections are up by almost 10% right now. If they end the year up by almost 10%, the county’s version of a savings account is going to end 2022 with about $1.1 million more in it than expected. (Barring some other unexpected event.) Given that, the county could reduce the property tax rate for the 2022 budget by an amount so that it brings in $1.1 million less than it would otherwise, and the county basically would be in the same position it thought it would be in when it gave preliminary approval to the budget earlier this month. That would reduce the mill levy by about 0.7 of a mill, leaving the county with about a 0.3 mill levy increase. Saving 0.7 of a mill would reduce the property taxes on a $200,000 home by about $16 a year.
Don’t get me wrong, I’m not saying that is what the county should do. That’s not really my role in this. As I’ve told government budget-makers over the years, they are the ones that have to hit a number. All I have to hit is a keyboard.
So, why can’t the city do the same thing with its expected $1.5 million? In short, because the city already has spent that money and then some. The city in early 2021 made a revised budget. By that time the city had a better idea of how the economy was bouncing back. It revised upward the amount of sales tax revenues it expects to collect. Instead of projecting that sales tax revenues will grow by about 5.5 percent over 2020 totals, the city’s new estimate expects sales taxes to grow by about 14% over 2020 levels.
Not only did it revise those numbers upward, the City Commission approved new, unbudgeted 2021 spending based on them. As we reported in April, the City Commission approved adding 20 positions and $2 million in payroll for 2021. Normally, the city would wait until budget season — which is now — to add positions, and those positions wouldn’t start until the beginning of the next year. But City Manager Craig Owens successfully argued that the positions were needed now and that the request shouldn’t wait for budget season.
Maybe you already have noticed this, but the most interesting detail is that the city is counting on a 14% growth rate in sales and use taxes this year, but with a little more than half the collections in the books, the city growth rate is at 11%. The city needs the pace of sales tax growth to accelerate in the remaining months of this year, or else it risks falling short of its budget.
The good news for the city is there are signs that growth is accelerating. Remember, collections for the month were up 18%. Keep posting months like that, and by the end of the year your total growth will be well above the 11% that it stands at now. The bad news is that is not guaranteed. If the virus picks up steam, for example, the city may well fall short of its expectations. In that case, it would have to dip into even more of its savings account — over and above the $8 million of savings and federal grant money it already is planning to use. Or, it could scale its spending plans back.
The county, on the other hand, basically has a $1.1 million cushion built into its budget in the event the economy turns south again.
So, two different situations for the city and the county. Those different situations aren’t because the city’s and the county’s economies are significantly different. They’re not. The difference is the philosophy of the two governments. The county is far more conservative and the city is far more aggressive. The county has budgeted for a decline in sales tax revenues this year. The city is expecting a 14% increase. That’s a huge difference.
It is fair to say that the change has mostly happened at the city. I’ve covered both governments fairly regularly for about 30 years. I’m comfortable saying the 2022 proposed city budget is more aggressive than any I remember. Of course, it also is the only one that is happening after a pandemic. (Or, at least, we hope it is after a pandemic.) To be clear, I’m not passing any judgement on the aggressiveness of it. I’m just noting that it is making some big bets on economic growth. On the other hand, it could be argued the county is being very conservative. It may choose to make no bet on the economy improving and simply allow its savings account to grow more than expected. Again, that’s not me judging, but rather just noting important differences in philosophy.
Maybe you are like me and slept through philosophy class, but if you are a taxpayer, you may want to spend time thinking about these. They likely will determine how much you pay in taxes for years to come.