Presented to the

Saline County Study Steering Committee

March 30, 1999

By

Anna M. Cox

Thomas G. Johnson

James K. Scott

Report S-99-01

This analysis does not constitute an endorsement of a use tax by the authors, the Community Policy Analysis Center, University Outreach and Extension, or the University of Missouri. Instead it is an attempt to measure the possible impacts of the tax should Saline County voters decide to pass such a measure.

Acknowledgements

Executive Summary

Use Tax Proposition

Key Findings

Issues for the Future

Changing Shopping Patterns - Impact on Local Retail Sales and County Revenues

County Use Tax Revenue Potential

End Notes

A number of people made valuable contributions to the completion of this report. The Community Policy Analysis Center wishes to thank the Saline County Study Scenarios Committee and the Steering Committee for their comments on draft versions of this report. CPAC would also like to thank Pat Gifford at the Missouri Department of Revenue for her help in obtaining important data used in this study and for her help in explaining the use tax issue. CPAC accepts full responsibility for the research findings and any errors in this report.

Mark Belwood
Kathy Borgman
Vincent Burke
Anna Cox
Cynthia Crawford
Roy Hunter
Tom Johnson
John Stouffer

This report was initiated at the request of the Steering Committee of the Saline County Study because of their interest in knowing the possible effects of a local use tax on their county. This report estimates these effects by first analyzing the impact of changing shopping patterns on the local retail sector. Then the effect of these changes on county government revenues is estimated. Finally, based on the experience of other counties, the level of use tax revenue possible in Saline County is reported.

Saline County is proposing a 1 percent use tax on the April 1999 ballot. A use tax is a kind of sales tax designed to make out-of-state purchases subject to the same tax rate as purchases made from within the County. It applies only to purchases made by County residents and businesses from out-of-state vendors--through mail order catalogs or over the telephone. The State already collects 4.225 percent in use tax on these purchases. This proposal will add a 1 percent use tax for Saline County, to match the sales tax rate on locally purchased items. Simply stated, the local use tax is a way to equalize the taxes retailers charge their customers, regardless of whether they are locally-based retailers or are based out-of-state.

Use taxes are not new to Missouri. Local governments across the state received these revenues for several years. But, in 1996, the State law governing the collection and distribution of local use tax revenues was declared unconstitutional. This law has now been revised to allow local voters the option to implement a local use tax. Voters in 21 counties and 77 cities in Missouri have already approved the revised version as a source of revenue.

Key Findings

• Almost 39 percent of all revenues that support Saline County public services now come from the County sales tax. Changes in local shopping patterns therefore have a serious effect on County services.

• Retail sales in the County are declining - from $1.8 million in 1996 to $1.65 million in 1998. Part of this decline is due to more purchases being made from out-of-state telephone and mail-order companies.

• Mail order and telephone-based sales are growing steadily. In 1998, over 14 percent of all sales and use tax revenues for the State of Missouri come from the use tax.

• Without a local use tax Saline County will experience a revenue shortfall each year, reaching $639,000 in 2007, assuming present trends continue.

• The proposed County use tax would immediately generate between $116,000 and $300,000 to support County Services.

• Only residents and businesses making out-of-state purchases will be affected by this measure. However, the proposed use tax would cost the average County resident from $5 to $13 in the first year.

Issues for the Future

• As more people and businesses use mail-order or other out-of-state purchasing methods, County growth in taxable retail sales will be reduced. This trend will affect all local governments.

• Equalizing the tax rate between local retail purchases and out-of-state retail purchase will remove the tax-related incentive to purchase items from out-of-state mail-order businesses.

• Declining sales tax revenues will limit the County's ability to provide key services such as law enforcement.

Saline County's local retail sales has been declining as a percent of total personal income since 1994 (Chart 1). This implies that people and businesses in Saline County are increasingly making their taxable purchases outside of the county.

Saline County is not the only county whose residents or businesses make retail purchases outside of the local area. Further, the county is not alone in shopping via catalog rather than in local retail shops. Nationally, mail order sales have been a growing portion of total retail sales, even though small on a percentage basis (Chart 2). In 1986, mail order made up almost 1.2 percent of total retail sales, growing to almost 2 percent of total retail sales by 1997.

Chart 3 shows Saline County's retail sales levels from 1990 to 1998 after being adjusted for inflation. Real retail sales fell by 5.3 percent between 1996 to 1997. Retail sales fell an additional 2.6 percent from 1997 to 1998. In real terms, taxable retails sales were about $2 million lower in 1998 than it was in 1990.

The decline in retail sales is occurring at a time when sales tax revenues are becoming an increasingly important part of total county revenues (Chart 4). In 1990, sales tax revenues made up 25 percent of total county revenues. By 1997, sales tax revenues were 38.5 percent of total revenues. Sales tax revenues increased from 1995 to 1996 because voters passed a 1/2 cent sales tax to fund law enforcement in the county. Half of the sales tax revenues collected after 1995 are dedicated to law enforcement while the other half goes into the general revenue fund.

The original Saline County baseline projections assumed that local retail sales would grow at a constant annual rate of 2.2 percent during the projection period. However, people and businesses are changing their purchasing habits, a fact not reflected in the baseline. Every year Missourians buy a higher percent of total purchases from out-of-state businesses (Chart 5). For fiscal year 1996, 10.1 percent of taxable retail purchases were made from out-of-state businesses, growing to 14.6 percent by fiscal year 1998^,. For this reason the Saline County retail sales growth rate was re-estimated using data on state trends.

A local use tax will have the effect of equalizing the taxes paid on retail items whether purchased locally or from out-of-state. This equalization removes the tax-related incentive for people to shop from out-of-state mail-order business, which may have the effect of increasing retail sales over the adjusted level (Chart 6). A use tax will offset the decreased county revenue displayed in Charts 7 and 8. The next section explores the actual level of revenues the county might expect if a local use tax is implemented.

The main question being asked with regard to a local use tax is how much revenue the county might expect if a use tax is passed. There is no precise answer to this question because data on the out-of-state purchases of county residents and businesses are not reported unless that county has a use tax. Because of the lack of data on the value of taxable retail items that Saline County residents buy from out-of-state vendors, the experience of the State or of those counties with use taxes are the only bases for estimating potential use tax revenues. Using the experiences of other counties assumes that Saline County will follow the same pattern. This assumption is approximate because relatively few counties have passed a use tax and because of the short time frame over which local use taxes have been in effect.

Missouri did collect a local use tax prior to 1997. However, the collection of a local use tax by the state was judged unconstitutional by the Missouri Supreme Court because the tax had not been passed by majority vote by each local jurisdiction's electorate. It is important to note that previous years' use tax receipts should not be used to estimate future revenues. The Missouri Department of Revenue distributed the former use tax to localities using a formula that was based neither on the level of out-of-state retail sales for each locality, nor on the level of each county's sales tax rate. This means that the former use tax receipts will not provide a good estimate of the future use tax receipts should voters pass a local use tax measure.

Table 1 displays the use tax receipts for a majority of the counties that have passed the use tax. As an example of the difference in revenues between the former and current local use tax laws, see Bates County in Table 1. Between 1993 and 1995 Bates County received between $25,000-$26,000 in use tax receipts under the former use tax law. Under the current local use tax law passed by voters in 1996, Bates County's receipts were over $36,000 in 1997 and remained at that level in 1998 (Table 1). Most counties' receipts are larger under the new use tax laws.

The proportion of total sales related tax receipts made up by the use tax is calculated for each county with a use tax (Table 2). The proportion is then used to calculate the potential use tax revenues for Saline County. Because the use tax laws changed so recently and 1998 retail sales data have not yet been released, this calculation can only be made for 1997. The proportion of sales related tax receipts attributed to the use tax ranged from 6.5 percent in Cole County to 15.2 percent in Lewis County. For Missouri, use tax revenues contributed 11.7 percent of the total sales/use tax receipts in fiscal year 1997.

Assuming that Saline County follows the pattern established by other counties, its revenues should fall within the range exhibited in Table 2. Saline County's 1997 sales tax receipts were approximately $1.7 million. Using 6.5 percent and 15.2 percent as limits and Missouri's percent as a middle point, additional revenues for Saline County in 1997 can be estimated (Table 3).

To estimate the use tax revenues over the projection period for Saline County, we start with Missouri data from 1997. In that year, State use tax receipts totaled 11.7 percent of all sales-related tax receipts. Out-of-state sales as a proportion of total taxable retail sales are growing at about 2.25 percentage points per year (Chart 5). Assuming Saline County sales patterns reflect statewide trends, we can project County use tax receipts over time. Chart 9 shows expected total county revenues through 2007 without a use tax implemented and with a use tax implemented. These numbers are charted with the projected demand for expenditures for the same time period. With a use tax, Saline County's total revenues exceed the projected total demand for services for the entire projection period. Under the assumptions, 34 percent of sales and use tax revenues would come from the use tax in 2007. One can imagine how total revenues with a use tax would shift if the beginning use tax percent were different from 11.7 percent (still assuming an annual 2.25 percentage points growth in the use tax proportion). That is, using a percent lower than 11.7 percent would shift the dashed-line in Chart 9 downwards, while using a percent higher than 11.7 percent would shift the dashed-line upwards.

The range in Table 3 can be refined slightly by comparing Saline County to counties that have a local use tax that are similar in terms of per capita taxable retail sales. Per capita retail sales is a good measure to use for comparison in this instance because it gives an indication of the purchasing power of local residents and the ability of the county retail sector to capture these purchases. Table 4 ranks the counties by per capita retail sales. Saline County's per capita retail sales is most similar to Linn and Henry Counties. Unfortunately, those counties' local use tax collections were not in effect for the entire year in 1997. The next most similar counties are Bates County and Platte County.

Bates and Platte Counties' proportions of sales-related tax receipts attributed to the use tax are 8.5 percent and 11.4 percent. Using these two proportions as the range for Saline County, another estimate of additional revenues for Saline County can be calculated (Table 5). It is impossible to test the accuracy of the estimates in Table 3 or Table 5. However, they do provide a framework for county residents to consider when voting on the local use tax measure.