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Surprise! City Sales Tax Receipts Rise, Defying COVID-19 PredictionsLock Icon

6 min read
City Sales Taxes Rise Paul Becker 136096
Paul Becker, chief financial officer for the city of Fayetteville. ( Corey S. Krasko)

When the pandemic began devastating commerce in March 2020, Arkansas cities slashed budgets and tabled projects, fearing sales tax revenues would fall off the shelf.

That “really didn’t come to pass,” said Paul Becker, chief financial officer for the city of Fayetteville. In fact, Fayetteville’s sales tax receipts for the rest of 2020 were up 5% over 2019’s numbers, and Becker’s pleasant surprise was typical of Arkansas municipal leaders who reflected on COVID-19’s effects on revenue.

Riding a wave of online buying, solid sales tax receipts defied expectations across the state.

“Back in April [2020], I certainly didn’t predict that,” Becker said. He warned the city council to prepare for “significant reductions in sales tax” but they never arrived.

Bryant Mayor Allen Scott halted unnecessary spending and ordered spending revisions. “I had each of my departments work up a plan for a 10% reduction and a 20% reduction in their budget just in case we needed them,” Scott said. He was glad they were unnecessary.

Cities now are going forward with projects, as tax revenue continues to grow and is supplemented with new federal dollars. (See Rescue Cash for Every City, County and Town.)

“If they were happy with what they have so far, they’re gonna be surprised by the continuation of it,” John Shelnutt, the state’s economic forecaster, told Arkansas Business last week.

All reporting industries were up by large percentages in March compared with March 2020, he said in a previous email.

City officials attribute the jump in revenue to internet sales that are now subject to state and local sales taxes. The collection of internet sales taxes started July 1, 2019, and cities began seeing the money in September 2019; there is a two-month lag for local sales taxes to be returned by the state. Last year was the first full year in which online sales taxes were collected.

Expecting the Worst

Becker said he thinks internet sales played a large role in Fayetteville’s increase in sales tax revenue in 2020.

It’s difficult to know for sure where sales tax revenue originates because the state doesn’t break out brick-and-mortar and internet sales as separate tax numbers.

When the COVID-19 pandemic began, Fayetteville braced itself for a 5% to 10% decline as the precautions essentially closed the city’s largest employer, the University of Arkansas, Becker said.

In the first few months of the pandemic, it was unclear when the students would return.

He said the city froze planned salary raises for its employees, fearing sales taxes would crater. Instead, sales tax numbers began growing.

Other cities were also expecting the worst. Even with the strong sales tax receipts flowing to Bryant each month, it was difficult to know if the money would continue, said Joy Black, the city’s financial director.

The time lag between collection and getting the money left cities plenty of time to fret.

Scott said that each month Bryant received its money, “it was like, well, will next month be the month it hits?”

It wasn’t. Bryant’s sales tax receipts were $16.6 million in 2020, an increase of 14.8% from the previous year.

City Sales Taxes Rise Paul Becker 136096
Fayetteville city CFO Paul Becker was glad his fears “didn’t come to pass.” ( Corey S. Krasko)

Revenue Jumps

Other cities reported eye-popping jumps in sales tax revenue. Sherwood, in Pulaski County, saw its sales tax revenue climb 21.2% last year to $13.2 million.

Sherwood Mayor Virginia Hillman Young attributed the jump to more people shopping online, and to Sherwood’s ability to capture the internet sales tax.

She also said the outlook for this year looks strong. The sales tax money the city recently received for its general fund for items bought in March was $811,908. “That was the highest collection we’ve ever received in the city,” she said.

In March 2020, Sherwood received $646,824.

Young said she thinks that March’s revenue was tied to the government stimulus payments of $1,400 to most Americans as part of the American Rescue Plan Act.

She also said it helped that Sherwood is a bedroom community and doesn’t rely on tourism for tax revenue. “We only have one hotel currently in Sherwood,” Young said. “So we did not have those revenues.”

Of the 50 cities that collected the most sales tax, only three saw a decline in revenue last year.

Eureka Springs, the Victorian Ozarks town heavily dependent on tourist spending, saw its sales tax receipts drop almost 3% in 2020.

Little Rock, normally a shopping hub for the surrounding region, experienced a drop of nearly 1% to $83 million from the previous year. Van Buren’s sales tax receipts fell 11%, but that was despite a 25% decrease in its sales tax rate (from 2% to 1.5%) effective Oct. 1, 2019.

Some cities with tourism economies thrived.

Mountain Home saw its sales tax revenue increase nearly 10% to $7.8 million last year.

“We are kind of a tourist area, but we’re a different type,” said Mayor Hillrey Adams. “We’ve got two lakes and the river here.”

From the end of May through August last year, the lake industry in the Baxter County seat of about 13,000 was “very, very busy,” Adams said. “People were coming here because you could be outdoors, but not be around a large group of people as well.”

He said the city had planned to ask its voters to approve two sales tax increases in March 2020 for a $38.6 million park improvement project that includes a new community center, but decided to put that on hold.

“When COVID broke out, we had a hard time getting the message out to people,” he said. The city council placed the proposal back on the ballot earlier this year. In March, voters approved it.

Chris Moore, the mayor of Lowell, said his city saw an increase in sales tax revenue of 23.34% and attributes the growth to an increase in population.

“Over the last year, we’ve seen three subdivisions come through,” bringing the total population to about 9,300, Moore said. And about 700 homes will be built in the next 18 months.

Still, at the start of the pandemic, Moore was concerned that the city’s sales tax revenue would plummet.

“And of course this year, we’re seeing numbers that are still above even those numbers,” Moore said. “I believe last month’s numbers were the highest that Lowell’s ever seen.”

Federal Spending

When the pandemic hit, economic forecasters expected a big decline in sales taxes, because of what had happened in previous recessions, said Mervin Jebaraj, director of the Center for Business & Economic Research at the University of Arkansas’ Walton College of Business.

While the sales declined in some industries such as hotels and restaurants, the federal government’s massive spending helped others. In addition to sending stimulus checks to Americans who qualified, people who lost their jobs during the pandemic received $600 per week in additional unemployment benefits, at least through August 2020.

“Typically what you see in other recessions is that spending drops off,” Jebaraj said. “But because of the amount of money that’s been put into the economy, in addition to people’s pockets, spending was sustained.”

Jebaraj said it’s difficult to say if the cities will continue to see the same sales tax revenue continue through the year as they did last year.

“I think consumers have gotten somewhat used to the new way of living their lives and shopping online and maybe not going out as much,” he said. “People are returning to bars; people are returning to restaurants, but not at normal levels yet.”

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