HdL Companies presents an update on California’s retail economy based on current first quarter 2026 data. Download the presentation deck to follow along with the recording.

Overview of Q1 2026 Results

California’s first quarter 2026 sales tax results showed a 4.0% year-over-year increase, exceeding prior expectations of approximately 1.2% growth. Performance was positive across several major industry groups, with countywide pools contributing nearly half of overall revenue growth. Results were supported by strong business investment, continued e-commerce activity, elevated fuel prices, and a rebound in general retail following a slower 2025.

Despite the strong quarter, the outlook remains cautious. Consumer savings rates are low, inflation continues to pressure purchasing power, and spending growth is increasingly supported by higher-income households and credit usage. Geopolitical risk, fuel volatility, interest rate uncertainty, and affordability constraints continue to shape the forecast.

Economic Indicators
Key indicators influencing the forecast include low personal savings rates, increased reliance on consumer credit, inflation pressure, interest rate uncertainty, global conflict affecting oil markets, elevated gas prices, strong investment in data centers and artificial intelligence infrastructure, and a declining recession probability compared with earlier 2026 levels.

Fuel & Service Stations

Fuel receipts are expected to remain elevated over the next four quarters due to higher prices compared with last year’s lower base. Oil prices spiked during the Iran conflict but have eased following a 60-day memorandum of understanding and reduced supply concerns. Gas prices have also begun to fall, though they typically lag crude oil movements. The forecast reflects continued risk from global supply conditions and geopolitical uncertainty, with receipts expected to taper once reserves are rebuilt and price comparisons normalize.

Autos & Transportation

Autos and transportation produced mixed results. Vehicle registrations were down approximately 9%, while sales tax receipts increased approximately 1%, reflecting timing differences and sustained high vehicle prices. Average vehicle prices remain near $50,000, well above pre-pandemic levels, with continued pressure from materials, tariffs, destination fees, and lower manufacturer margins. Hybrid vehicles gained traction following the expiration of the federal EV tax credit, while EV-focused brands experienced weaker registration activity. The near-term outlook remains flat due to affordability constraints, but replacement demand is expected to build as the average vehicle age approaches 13 years.

Building & Construction

Building and construction remains constrained by housing affordability and weak housing turnover. Existing home sales have fallen to levels not seen since the Great Recession, as homeowners remain locked into lower mortgage rates and buyers face high prices and borrowing costs. Near-term results are expected to remain uneven, but the longer-term outlook is more constructive due to housing demand, policy interest in supply expansion, streamlined approvals, accessory dwelling units, modular construction, and large homebuilder investment.

Food & Drug

Food and drug results remained slightly down to flat, continuing a muted trend for the category. Traditional grocery remains under pressure, while premium, specialty, and international grocery formats continue to expand. Although consumer behavior is shifting, overall taxable activity in the category is expected to remain relatively stable, with little near-term change projected.

General Consumer Goods

General consumer goods improved in the first quarter after two years of declines in brick-and-mortar retail. Physical retail still represents the majority of retail sales tax activity, while online sales continue gaining share. Spending growth remains positive, but transaction growth is weaker, suggesting higher prices are supporting revenue more than increased purchase volume. HdL forecasts just under 2% growth in fiscal year 2025–26 and approximately 1.5% growth the following year, reflecting modest but improving performance.

Countywide Pools

Countywide pools posted strong growth of approximately 10.2%, though adjusted growth was closer to 6% after accounting for taxpayer reporting anomalies, audit corrections, and errors. Growth was driven by e-commerce, marketplace sellers, business and industry allocations, energy, and audit-related shifts. Marketplace sellers remain the largest pool component and grew 13.6% in the quarter. Fiscal year 2025–26 is expected to benefit from audit activity and one-time payments, with growth normalizing in fiscal year 2026–27 as one-time factors are removed.

Business & Industry

Business and industry posted positive results, led by fulfillment centers, which grew 12.5% on a gross basis and just over 8% after adjustments. Other positive contributors included medical biotech, light industrial, business services, IT, and computer and office equipment. Data centers are also influencing sales tax activity, primarily through construction, maintenance, and capital spending rather than ongoing operational sales tax. Challenges remain in energy utilities, agriculture, and warehouse, farm, and construction equipment. The category is expected to grow around 3% in both the current and following fiscal years.

Restaurants & Hotels

Restaurants and hotels grew approximately 4.2% in the first quarter. Casual dining increased approximately 4.5%, while hotels and motels posted the strongest gains, supported by major one-time events including the Super Bowl in the Bay Area. Restaurant traffic remains pressured, but higher menu prices are keeping revenues positive. Tourism, major events, labor costs, automation, closures, and changing consumer preferences will continue shaping the outlook. Future activity is expected to benefit from major events in Southern California and the 2028 Olympics, though geopolitical uncertainty and fuel costs remain risks.

Outlook Summary

The overall outlook reflects a return to growth after two years of modest statewide sales tax declines. Fiscal year 2025–26 and fiscal year 2026–27 are expected to show positive results, with longer-term growth returning toward a more normal range of approximately 3.0% to 3.5% annually. Results will vary significantly by jurisdiction depending on local tax base composition, including exposure to fuel, e-commerce, fulfillment centers, data centers, construction, tourism, restaurants, hotels, and traditional retail.

Q & A

Q: Is the fuel and service station forecast updated for current geopolitical tensions in the Middle East?

A: Yes. The forecast reflects current geopolitical tensions, but the situation is changing quickly. Prices have recently dropped following easing tensions and a new memorandum of understanding, though risks remain.

Q: How should agencies interpret statewide growth compared with their own results?

A: Statewide growth may not match local results. Each agency’s tax base composition matters, and jurisdictions with strong fuel, fulfillment center, e-commerce, restaurant, hotel, business and industry, or construction activity may see different results than communities more dependent on traditional retail or autos.

Q: Are countywide pool results expected to remain this high?

A: Not at the same level. First quarter pool growth was boosted by e-commerce, audit-related adjustments, energy allocations, and one-time payments. HdL expects continued positive growth, but future periods should normalize as one-time factors are removed.

Q: Do data centers create recurring sales tax revenue?

A: Not necessarily. Data centers can create sales tax activity through construction, maintenance, and capital spending, but HdL does not currently see substantial ongoing operational sales tax from data centers.