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July 14, 2008

DiNapoli: Increasing Dependence on Sales Tax
Makes Counties More Financially Vulnerable

Urges Caution in Forecasting Future Sales Tax Revenues

New York State counties’ increasing reliance on sales taxes over the past 10 years has left them more vulnerable to the current economic downturn, according to a report released by State Comptroller Thomas P. DiNapoli. DiNapoli noted that 43 counties in New York State share their sales tax revenues with local governments, generating a ripple of that vulnerability.

“Sales tax revenues are economically sensitive,” DiNapoli said. “The economic downturn will likely have a significant impact on sales tax revenues. Counties – especially those that rely heavily on the sales tax – should forecast revenues conservatively. The economic rollercoaster ride is far from over, and if counties want to avoid fiscal calamity, they should recognize the impact fluctuations in sales tax revenues can have on their budgets.”

Recent trends in sales tax collections show wide variations by region but so far overall growth has continued despite the economic downturn. DiNapoli’s report identified a number of reasons why the recession has not yet fully impacted sales tax collections. Some counties have increased sales tax rates or expanded their sales tax base. Border counties appear to be benefiting from an influx of Canadians taking advantage of the weak dollar. Increasing energy costs have also impacted recent sales tax collections – higher gasoline costs in particular generate higher sales tax revenues. But the increasing energy costs – including home heating – will likely force consumers to reprioritize other spending, and sales of automobiles and other durable goods that make up a large part of a county’s sales tax revenues will likely decline.

The report found that, despite the recent short term trends, local governments should use caution in projecting sales tax revenues for the next fiscal year. A recent report released by the Rockefeller Institute found that sales tax collections declined in 21 of 45 states during the first quarter of 2008 compared to the same quarter in 2007 and New York State is projecting that sales tax receipts should increase by only 2.9 percent. DiNapoli’s report also found that counties:

  • saw an increase in sales tax revenues, as a share of total revenue, from 21.3 percent in 1996 to 26.9 percent in 2006;
  • have made sales tax revenues their largest revenue source, surpassing the real property tax; and
  • although state law permits only a three percent local sales tax, 51 of 57 counties have received special state authorization to levy above this rate and 44 of 57 counties impose sales tax rates of four percent or more.

In order to help counties more accurately forecast their sales tax, the Department of Taxation and Finance has agreed to accelerate the release of detailed 2006-07 data later this summer.

Click here for a copy of the report.


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