Sales-tax budgeting 101

Local sales-tax collections in New York State totaled $18.3 billion in 2019 for a year-over-year increase of 4.7 percent, according to state comptroller Tom DiNapoli’s office. There’s a lot of money at stake.

Sales-tax collections, calculated quarterly by the state, represent the largest slice of the Ulster County government revenue pie, 37 percent of all money collected. It’s the lifeblood of the county government’s revenue stream, way more than the 22 percent from property taxes — the politically unpalatable alternative the county might have to resort to increasing should sales-tax revenues falter. The 2020 county budget also anticipates 16 percent of county revenues from state aid, ten percent from federal programs, and the residual 15 percent from all other sources.

Ulster County’s sales-tax collections in 2019 were well above the state average, showing a sprightly increase of 5.9 percent over 2018. The comparable 2019 results for Ulster’s contiguous neighbors varied: 5.8 percent in Greene, 5.7 percent in Dutchess, 3.9 percent in Orange, 1.9 percent in Sullivan, and minus 2.1 percent in Delaware County.     

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With New York State losing population and the upstate economy mired in near-constant recession and dwindling brick-and-mortar retail sales, one might well wonder how sustainable an expectation of higher sales-tax revenue well above the rate of inflation can be. According to the calculations made by state comptroller Tom DiNapoli based on state tax data, however, the 2019 figures show little weakness. Ever since the catastrophic Great Recession reduced state sales-tax revenues by a whopping six percent in the single year of 2009, statewide sales-tax collection numbers have gone up each and every year. “While [2019’s growth rate]was slower than the 5.3 percent annual growth for 2018,” wrote DiNapoli recently, “it exceeded growth in all other years since 2013.”

For the finance departments of local governments that depend on its revenues to balance their budgets, sales taxes are an up-and-down business. Tracking future tax collections at the county level can be as much a guessing game as a science. Though collections roughly track the economic cycle, there’s enough variability in them due to time lags, “technical adjustments,” early or late payments by big vendors, changes in payment formulae, or new patterns of just plain cheating to cause chronic headaches for economic prognosticators.

On June 21, 2018, The Supreme Court ruled 5-4 in South Dakota v. Wayfair that a state can mandate that businesses without a physical presence in that state (a standard subject to creative interpretation) but with more than 200 transactions or $100,000 in-state sales had to collect and remit sales taxes on transactions within the state. Sellers who reached state-mandated levels were required to start collecting — and paying — state sales taxes immediately. 

Wayfair has clarified the playing field in the struggle between brick-and-mortar and on-line businesses. In order to maximizing its revenue opportunities and enforcement costs, New York State has since decided its system would start the day of the Wayfair decision. New York’s required level for in-state sales is $500,000. Whatever loophole existed because of the effects of the physical-presence rule on sales-tax collection patterns is now gone. On-line commerce is now competing — largely successfully, it would appear — with its brick-and-mortar rivals.

Though Wayfair must have had a positive influence on recent collections, the largest on-line vendors were already paying sales taxes to New York State. Unresolved at this point are such matters as whether sales of hosted software or software-as-a-service are considered sales of tangible personal property subject to taxation. 

Also having an effect on sales-tax revenues in 2018 was the Tax Cuts and Jobs Act of December 2017, under which taxpayers’ deductions from state and local taxes of real estate, personal property, and either income or sales taxes was capped at a total of $10,000. That law has disproportionately affected New York State. 

Carrying over a surplus of $4.75 million in sales-tax revenues between what it budgeted for 2019 and what it received, Ulster County government is projecting a five percent increase in sales-tax revenues in 2020. 

Is that prudent budgeting? Let’s do an exercise we’ll call Sales-tax Budgeting 101. 

Let’s assume for the sake of argument that for a variety of reasons Ulster County’s increase in sales-tax collections in 2020 comes in at the lowest statewide average in the last ten years, 2.3 percent, rather than at the budgeted five percent. In that case, by my calculation, revenues would increase over DiNapoli’s actual 2019 collections number of $127.190 million to $130.115 million in 2020, or $1.554 million above the Ulster County’s adopted 2020 budget number of $128.561 million. The 2020 budget would still balance, but with less of a carryover surplus the county would be in a pickle when it comes to 2021 and then 2022. 

To restore the previous financial balance, it would have to consider raising other taxes or, heaven forbid, cutting services. Finding neither option attractive, most governments threaten to raise taxes, sometimes back off In part, and congratulate themselves on their good management skills. This past year Westchester County increased its sales-tax rate, bringing in a handy $70 million in new revenues. Orange County just last week tested the waters of a quarter-of-one-percent increase, blaming the preemptive move on the possibility that Albany might make the counties shoulder a greater share of Medicaid expenses. “Albany is leaving us with one choice to pay for their mandates,” the Times Herald-Record quoted Orange County finance commissioner Karin Hablow as saying about the possible increase.

Thorough studies of cost-cutting possibilities before action is needed have been a more rational alternative that governments have been traditionally loathe to consider when revenues drop. What services are duplicative? Which are more expensive than if provided by contract entities? Which are unaffordable?       

Under the terms of a five-year agreement made with the City of Kingston in 2016 and expiring on the last day in February next year, Ulster County gets 85.5 percent of the county sales tax, Kingston gets 11.5 percent, and the towns divide the remaining three percent.

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