HdL presents an update on California’s retail economy based on current 4th Quarter 2024 data. Download the presentation deck to follow along with the recording.
Transcript
Q4 2024 California Sales Tax Results
The fourth quarter of 2024, encompassing October, November, and December, includes the holiday shopping season, which is typically the highest revenue-generating period of the calendar year. During this quarter, California experienced a 1.2% decline in sales tax revenue compared to the previous year. The decline was anticipated due to ongoing economic uncertainties, and while it wasn't a significant surprise, it was slightly softer than initially expected.
The Autos & Transportation, Building & Construction, and Fuel & Service Stations sectors contributed significantly to the decline. Despite the overall negative trend, the Restaurants and County Pools sectors showed resilience, providing a slight lift to the overall results. Consumers continued to spend, albeit more cautiously, prioritizing essential goods and seeking value in their purchases. Savings and disposable income are showing similar trends to the third quarter, with consumers digging into their savings due to higher prices and economic pressures.
The Federal Reserve made reductions to the Fed funds rate at the end of 2024 and the beginning of 2025. While these reductions are beneficial, they may not be sufficient to spur significant economic growth. The broad and unpredictable nature of tariffs adds complexity to the outlook. The forecast anticipated more substantial declines in interest rates during early 2024 to stimulate the economy, but the current situation remains somewhat stagnant and uncertain. The forecast has been adjusted based on these expectations, predicting a 1% decline in the near term before returning to 1.6% growth at the end of 2025.
Autos & Transportation
The Autos and Transportation sector has been significantly impacted by tariffs. A 25% tariff on aluminum and steel imports went into effect on March 12th, adding approximately $400 to the average cost of a vehicle. An additional 25% tariff on all cars imported from outside the United States has been confirmed beginning April 3rd, affecting both imported vehicles and vehicle parts. Given the interconnectedness of the global auto market, with many cars manufactured in the United States containing a substantial portion of parts from other countries, estimates suggest these tariffs could increase vehicle costs by $4,000, with some electric vehicles potentially seeing increases in the $10,000 range.
The sector faces added challenges reminiscent of the COVID-19 pandemic, where production halts led to lower inventory, higher prices, and increased revenue despite lower unit sales. However, unlike during COVID-19, there is currently less market liquidity, tighter credit conditions, and reduced government support. Despite these challenges, the sector benefits from an aging vehicle fleet, pent-up demand, a robust job market with 4% unemployment, and 15-year high wage growth.
The Autos and Transportation sector saw a 1.3% decrease in the fourth quarter of 2024. This decline continues a trend observed over several quarters, influenced by higher vehicle prices and tighter credit conditions. While the forecast for Q4 closely matched projections, the forecast for fiscal year 2025-26 has been revised downward to account for these factors and heightened uncertainty. Approximately 1.4% growth is now anticipated for the next fiscal year.
Fuel & Service Stations
Fuel and Service Stations results closely matched projections, experiencing a significant 14% drop in sales tax revenue. The decline was primarily due to lower gas prices during the quarter, driven by decreased crude oil prices. The reduction in fuel prices, while beneficial for consumers, negatively impacts sales tax revenue from this sector. The volatility in global oil markets and changes in consumer behavior, such as increased remote work reducing commuting, also play a role in this decline. The sector's performance is closely tied to broader economic trends and geopolitical factors affecting oil supply and demand. The forecast for 2025-2026 anticipates 3% growth.
Building & Construction
The Building and Construction sector is also heavily impacted by tariffs, economic policy, and interest rates. Headwinds include concerns about changes in Washington potentially impacting federal funding and reimbursements for a variety of projects including infrastructure, low-income housing, and high-speed rail. There is also trepidation around how deportations might impact an already stretched labor force. Tariffs on lumber are rumored to be on the horizon, potentially adding significant costs to home prices.
High mortgage rates and elevated home prices have dampened market activity. The construction industry is sensitive to changes in interest rates, which affect financing costs for both builders and buyers. Despite these challenges, there is some positive momentum from infrastructure projects and rebuilding efforts following natural disasters, which provide a partial offset to the overall negative trend. The final quarter of 2024 declined by 4% for this sector, and the forecast anticipates a 1% decline for 2025-2026.
Food & Drug
The Food and Drug sector, which accounts for about 4.4% of total sales tax revenue, saw an overall slight decline. Cannabis sales dipped significantly at 10% negative growth, continuing a three-year downward trend since the peak in 2021. This downturn reflects broader market adjustments and regulatory changes.
The sector faces challenges from changing consumer preferences and increased competition from online retailers. Drug stores have been notably affected by the shift towards online shopping and consolidation within the industry, as well as segments of the convenience store category, leading to downsizing and closures. Despite these challenges, certain subcategories, such as health and wellness products, continue to show resilience. These trends are expected to persist, with modest growth anticipated in 2026. However, the forecast for fiscal year 2025-26 predicts a slight reduction, with an overall decline of -0.5% for the year.
General Consumer Goods
Total retail sales show a continued migration to online shopping, with brick-and-mortar stores experiencing a slowdown. Tariffs could impact General Consumer Goods categories, both online and in-store, but significant negative effects are not expected. As prices rise, sales tax may increase, though it could lead to reduced purchasing. Shoppers are likely to continue seeking deals both online and in physical stores.
General consumer goods, particularly brick-and-mortar stores, faced a 2.2% decline. Seven out of the top ten categories in this sector reported negative growth. Family apparel, which constitutes about 15% of the overall group, was up by 1%, driven by off-price retail concepts. Discount department stores, which include fuel pumps at some locations, were impacted by the 14% drop in fuel prices. The ongoing price fatigue among consumers, coupled with economic uncertainty, contributes to the decline. Despite these challenges, certain categories, such as discount department stores and family apparel, show resilience as consumers seek value and affordability.
Forecast considerations for brick-and-mortar general consumer goods include price fatigue, declining consumer sentiment, and the growing preference for online shopping. The remaining two quarters of this year are projected to be down, with gains expected in the third quarter of 2025. Overall, a 2.2% decline is anticipated for 2024-25, with modest growth of about 1% for 2025-26.
Countywide Pools
Countywide Pools showed a 4.1% increase, with all categories reporting positive growth. Breaking down the pools further, General Merchandise, which includes exclusively online businesses, accounts for about 17% of the pool and saw a 1% increase. The Apparel and General Consumer Goods category comprises 16% of this sector and was up 7%. Light Industrial and Medical/Biotech each represent 5% of the total and showed over 10% growth. Overall, the top ten categories in the pools performed slightly stronger than projections at 4.3%, contributing to an overall increase of 4.1% in the fourth quarter.
E-commerce continues to rise, as consumers look for value and compare prices online. Economic uncertainty and fluctuating consumer sentiment may affect spending patterns. The forecast for the pools anticipates solid growth of about 3% for the next six quarters, leading to 3% growth for both 2024-25 and 2025-26.
Business & Industry
The Business and Industry sector showed mixed results. Fulfillment centers, which make up 32% of this group, grew by 11%. Excluding fulfillment centers, the top ten groups were down 3%, with energy projects experiencing declines due to timing. Meanwhile, AI-related projects are driving growth in the Electrical and Office Equipment categories. Medical/Biotech, which accounts for about 9% of the group, remained flat this quarter. The forecast anticipates flat overall results, with potential gains in fulfillment centers and slowing in other categories, leading to a projected 1.6% growth for 2025-26.
Restaurant & Hotels
Restaurants and Hotels reported positive results, with a 1.3% increase. Casual dining and quick service restaurants, which constitute 73% of this sector, performed well. However, fine dining experienced a decline as consumers opted for more affordable dining options.
AB 1228 requires national fast-food chains with at least 60 stores to pay a minimum wage of $20.00 an hour as of April 1, 2024. In response, many limited-service restaurants have reduced their number of employees to manage rising costs and labor shortages. Despite these challenges, some restaurants required to increase labor costs have maintained positive results due to rising menu prices and consistent foot traffic. Others have remained flat or slowed, and many establishments not required to increase wages have done so to attract workers.
The sector benefits from the ongoing recovery in consumer spending and the increase in travel and tourism. Despite the challenges faced by fine dining, the overall outlook for the sector remains positive. The forecast for the restaurant sector is lower than historic growth but still positive, with 1.3% growth expected this year, and 2.8% growth for 2026.
Summary
For the current fiscal year, the forecast shows a 1% decline, which is slightly softer than the 0.8% decline anticipated last quarter. This adjustment reflects ongoing uncertainties related to tariffs, inflation, and other economic factors. Looking ahead to fiscal year 2025-26, positive growth of 1.6% is projected, down from the 2.6% forecasted last quarter. This revision accounts for the same uncertainties. Growth is expected to approach 3% by fiscal year 2026-27, with outer years potentially seeing closer to 3.5%, aligning with historical norms.
It is important to note that inflation does not necessarily correlate directly with sales tax revenue. When prices increase but consumer purchasing remains stable, sales tax revenue can continue to rise. Therefore, even with tariffs and higher prices, sales tax revenue may not necessarily decline. As always, these results and forecast will vary regionally, and dependent on the business landscape of each municipality.
AB 2854 Update
Compliance due by April 30th
AB 2854, passed in the last legislative session, introduces a reporting requirement for tax sharing agreements. All agencies must report to the California Department of Tax and Fee Administration (CDTFA). Even if an agency does not have any tax sharing agreements, it must still report a zero to the CDTFA.
For agencies with tax sharing agreements, it is required to maintain a visible hyperlink on the agency's website. This link should provide access to the contracts and all information required under AB 2854. Agencies should work towards posting this information online and provide CDTFA with the necessary links.
CDTFA will email a link for the reporting form to all agencies from the email account
Additionally, there is an upcoming webinar hosted by Cal Cities in collaboration with CDTFA to walk through the reporting requirements and other relevant information. The webinar will take place on Thursday, April 10th at 10:50 AM. You can sign up for the webinar on the Cal Cities website (calcities.org) under the upcoming events section.
Q & A
Q: What is the reporting period for AB 2854?
A: The reporting period for AB 2854 is the fiscal year 2023-24, due by April 30, 2025. Each year thereafter, agencies will need to update their websites and provide the necessary links and information to CDTFA based on the fiscal year. For example, after completing the 2023-24 reporting, the focus will shift to the 2024-25 fiscal year, which will end around the same time the next year.
This schedule allows ample time for agencies to complete their annual reports and conduct audits before addressing the requirements under AB 2854. This ensures that all necessary information is posted and communicated to CDTFA in a timely manner.
Q: When will the CDTFA send the link?
A: The link is now available here: Tax Revenue Sharing Agreement Reporting Form
Q: Does the tax sharing agreement reporting requirement include property tax, too? What about Transient Occupancy Tax (TOT)?
A: The reporting requirement under AB 2854 only includes sales tax. It does not cover property taxes, TOT, or any revenue-sharing agreements between local agencies, such as agreements between neighboring cities or county share programs for public safety services. These types of agreements are not required to be reported under AB 2854.
Q: If an agency does not have a tax sharing agreement, is it still necessary to have a web page stating that none exists?
A: Per the CDTFA website: “If a local agency has not directly or indirectly paid, transferred, diverted, or rebated any sales and use tax revenues pursuant to an agreement in the immediately preceding fiscal year, then RTC section 7213 requires the local agency to report that fact to CDTFA and exempts the local agency from the publication requirements applicable to tax revenue sharing agreements.”
It is advisable to err on the side of caution. Collaborate with your IT team to clearly indicate on the city webpage that your agency does not have any tax sharing agreements. This proactive approach ensures that you can provide this information to CDTFA if needed, covering all bases and maintaining transparency. Regardless, all agencies must still report to CDTFA, even with a $0.00 declaration.
Q: Is the forecast regarding the drop in sales tax for 2025 reflective of both Bradley Burns as well as district tax?
A: This consensus forecast is solely based on Bradley Burns. Local district tax may perform differently depending on your local community when compared to Bradley Burns. Transactions and use tax in each city will depend on what local consumers are buying and having shipped into the city.
