As COVID-19 spread, businesses shut down — some for good — and economic panic began to set in.
The same narrative could be found in every media outlet — small businesses were hurting and damage to those businesses hurt the whole economy.
Jobs were slashed and wallets tightened. With less economic activity came the fear of further complications as tax revenues are expected to take a hit. Services funded through tax revenues would have to be evaluated and budgets would need to be cut.
But one tax hasn’t taken as big a hit as you might expect: sales tax.
Some of the hardest-hit businesses amid this economic downturn are the type generating large amounts of sales tax — department stores, malls, restaurants.
But sales tax is less volatile on a more macro level.
While fewer people will purchase food at a restaurant with dine-in seating closed, grocery purchases will rise as more people eat at home. Bars will struggle to reopen after going weeks without business, but liquor stores are seeing a nice boost in sales.
“People always need to eat and do all that,” economist and University of Central Oklahoma professor Travis Roach said.
Roach compared volatility of sales tax revenues to several commonly used state funding mechanisms. Property taxes are the least volatile as property ownership remains stable even during tough times.
The most volatile? That would be income taxes, according to Roach. If thousands lose their jobs, they suddenly have no income to tax.
All of these situations depend on how long the hardship in a community or state lasts. The COVID-19 pandemic is starting to show its effects in sales tax revenues, but it could worsen with time.
“This may not show up in sales tax quite yet, but I think the longer it persists the more an effect this starts having,” Roach said.
2019 Collection Amounts
How much a city collects in sales tax is due in part to its tax rate, but also the economic activity.
Oklahoma City’s median monthly collections were more than $40 million in 2019, according to an analysis of Oklahoma Tax Commission records performed by Oklahoma Watch.
Tulsa, with a population of 410,190 compared to Oklahoma City’s 655,057 and a lower tax rate, only collected about $24.6 million monthly.
McAlester (pop. 17,814) had median monthly collections of $1.3 million in 2019.
Budgets in these three cities differ dramatically, but one thing is the same — these sales tax collections make up a large portion of each.
“In Oklahoma, that level of government is funded almost entirely by the sales tax,” Oklahoma City Mayor David Holt said. “We don’t have a lot of fluff at the city level, it’s all core services. We are heavily reliant on sales tax.”
City Collections After Outbreak
All three cities mentioned above are struggling with monthly collections post-coronavirus outbreak this year. May’s monthly report showed drops in all three cities compared to the median amount each city collected in 2019.
Oklahoma City’s drop was nearly $6 million, Tulsa’s almost $4 million. And for a city like McAlester, a decrease of $100,000 off an expected collection can be just as hard to budget for as Oklahoma City’s drop.
The dollar amount seems shocking, but statewide collections are down only 3% compared to this time last year. As June began, Oklahoma collected nearly $152 million less in sales tax.
But the tax has generated more than $4.3 billion already this year.
What Is Lost When Revenues Fall
Sales tax is largely responsible for funding construction for the roads you drive, upkeep for the parks you love and treatment of the water you drink.
That tax helps pay salaries for the firefighters and police officers. It can be used to provide safe rooms in schools or fund arena upgrades for the Oklahoma City Thunder.
It’s easy to forget why we end up paying an extra seven or eight cents for that $1 candy bar at the gas station. A few pennies on every dollar spent in Oklahoma add up to large chunks of change used to provide services across the state.
Each municipality is allowed to set its sales tax rate, which is in addition to the state’s rate of 4.5 percent and any applicable county rates. As a result, most consumers pay in the ballpark of 7 or 8 percent in sales tax.
A municipality also can choose to dedicate portions of its sales tax to specific purposes. Oklahoma City’s MAPS programs are an example of this sort of sales tax dedication. Voters have repeatedly chosen to add an extra penny to their sales tax rate in order to fund downtown projects. They recently approved MAPS 4, which will raise nearly $1 billion over eight years for 16 projects including Oklahoma City park renovations, new youth centers and improved transit.
McAlester also has voter-approved additions to its tax rate dedicated to specific community needs. Portions of its sales tax help fund a cancer center at McAlester Regional Health Center, as well as the construction of safe rooms in schools, McAlester Mayor John Browne said.
“Municipalities don’t get other taxes for income,” Browne said. “The true methods of funding for cities are sales taxes and services and fees.”
Signs of Hope
Cities see month-by-month fluctuations in sales tax revenues every year, and there is still time to bounce back in the second half of 2020.
Oklahoma City saw a nearly 6 percent decrease in sales tax collections from April to May. In 2019 the city saw a 12% decrease one month, and 3% decreases on two occasions. Tulsa and McAlester also have seen similar fluctuations in the past year.
But it’s also likely sales tax revenues will remain sluggish for months as thousands of Oklahomans remain unemployed, the coronavirus remains a dangerous threat and the oil industry continues to struggle.
McAlester Mayor John Browne said it now costs close to $1 million to build one mile of a new road. And even if new roads aren’t being built, maintenance is also expensive and his city has about 174 lane miles of roads to care for on an already tight budget.
“We won’t be able to do as much work on streets and sewers and we’ve had to furlough employees due to the cascading loss of sales tax revenue,” Browne said.
Holt hopes the revenues will bounce back as stores reopen.
“It’s worth noting that the worst is probably behind us,” Holt said. “It may be a long climb, but it would be hard to be worse than a significant number of retail establishments being closed.”
Even with open businesses, consumer behavior is of concern to UCO’s Roach, who is curious to see how cautious people are with their spending. Total cases of coronavirus recently topped 11,000, and there have been more than 370 deaths. Health concerns could keep consumers at home even if stores are open for business.
“There’s no governor or president who can decree you go back to buying things,” Roach said.
David Dishman is the business editor for The Oklahoman. Contact him at firstname.lastname@example.org. Follow him on Twitter at @Dishman5.
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