California's Q4 2020 retail sales experience decline but pandemic impacts are not as far off from previous year as expected.
Public agencies throughout California continue to struggle with the financial impacts of the pandemic. The state’s local one-cent sales and use tax from sales occurring October through December was 1.9% lower than the same quarter one year prior. The losses were geographically concentrated in the Bay Area and communities along the south coast. Meanwhile, much of inland California, including the San Joaquin Valley, the Inland Empire, Sacramento and northern regions, exhibited gains of 6.9%. Perhaps a bright spot, the statewide drop of 1.9% was less than feared due to the widespread lockdowns that were in place throughout much of the holiday season. This is the latest data reported from the California Department of Tax and Fee Administration. HdL Companies, the leading provider of revenue enhancement technology and consulting services for local governments, provides quarterly insights on California’s sales tax receipts and the impact on local jurisdictions.
“It’s easier to breathe now as the feared fourth quarter losses in sales tax revenues over the holidays did not occur,” Andy Nickerson, HdL’s President and CEO, commented. “I give credit to the California consumer who shifted priorities and kept spending in the middle of a pandemic spike, in addition to receiving Federal stimulus dollars that helped sustain consumer spending. While people were not dining out much, they were buying new cars and remodeling their homes–which helped put a floor on sales tax revenue declines. There are some supply chain risks with new automobiles and increased costs for raw materials in construction that could slow things down in the coming quarters. But at the same time, California is seeing more people vaccinated each day with light at the end of the pandemic’s tunnel.”
“Rising prices for building materials combined with strong demand for housing and remodel activity also drove sales tax receipts,” Andy added. “Even with automobiles, HdL is seeing increased demand for a limited supply of new automobiles. New car inventories are down due to COVID-induced production delays and a shortage of microchips. Combine increased demand with reduced supply and you will find some dealers asking for and getting $5,000 to $20,000 above sticker price on popular models." Brick-and-mortar retailers continue to be negatively impacted by lockdown policies as consumer habits continue the shift to online shopping. Restaurants and hotels suffered the largest losses in Q4 with tourism-driven communities seeing the greatest impact on their hotel taxes. Fuel and service stations revenues also lagged the prior year performance. Bright spots for sales tax revenues in Q4’s data included an increase in the purchase of high-end luxury automobiles, boats, motorcycles, RVs and sporting goods/equipment. The building and construction sector also showed strong gains. Dramatic sales tax revenues routed through countywide use tax pools as a result of online purchases further helped offset the declines. That data also affirmed the accelerating trend toward online shopping and likely cements a permanent shift of consumer habits to this more convenient experience.
Significant recovery in local government sales tax revenues is not anticipated until the 2021-22 fiscal year (beginning July 1, 2021) with full recovery to pre-pandemic levels dependent on the specific character and make up of each jurisdiction’s tax base. Widespread adoption of the COVID-19 vaccine will help businesses, restaurants, venues and theme parks reopen as consumers get more comfortable being in crowded spaces. Recent approval of the American Rescue Plan Act of 2021 will further support consumer spending, albeit in targeted segments. Finally, pent up demand for summer outdoor experiences and travel is likely to be unleashed this summer, crowding freeways, national parks and other tourism hotspots. All these changes could result in a net spending shift away from taxable goods and towards entertainment and services.
California’s economy will look different than before the pandemic. Recent surveys suggest that three out of four consumers have discovered new online shopping alternatives and half of consumers expect to continue these shopping habits. “In the world of sales tax, this means a more aggressive shift of revenues allocated through countywide use tax pools and industrial distribution centers rather than store fronts. It will also put new pressures on small retailers in downtown cores to compete with online retailers and likely continue the shift to entertainment experiences in retail zones,” concluded Andy. “Public agencies will need to evaluate their sales tax strategies, economic development strategies and revenue measures to adjust to these changing circumstances.”
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