March 23rd, 2020

COVID-19 and your sales tax

The question every client is asking, how bad is it? Well, after tracking a week of consumer traffic data, we are now ready to dig in and try to answer that question.

First, the good news. Local government organizations across Texas have come together to help each other out in a time of need. We are sharing data, resources, and emergency continuity plans. Once again, Texas is shining during a disaster. But as managers and local government professionals we know the impact of COVID-19 will be lasting both in the near and long term. Over the last twenty years, we have performed pandemic table top exercises preparing for this day, and although we may have gotten a rough start, we have followed the plan

Here is what we know

In the areas of Texas where social distancing limitations started occurring last week, consumer traffic is showing 25-45% decreases. We can’t show an exact correlation between consumer traffic and sales tax revenue, but one can make a reasonable assumption that severe double-digit percentage drops will occur in industries related to retail traffic.

For projection purposes, cinemas and other entertainment users should be zeroed out on a week-by-week basis. Restaurants that still allow inside dining will show decreases greater than 30%, and restaurants that have moved to delivery, takeout, and curbside will show decreases of at least 50%. These assumptions are based on data that comes from the new ZacRT (real-time) system and conversations with numerous business owners in the retail, restaurant, and entertainment sectors.

The only bright spot in sales tax revenue will be with grocery and home essentials. These retailers are seeing large upticks in traffic. We have recorded 30-45% increases in traffic at most major grocers, at some home improvement locations, and we expect the same level of increases with online orders. We can thank our lucky stars for the Wayfair decision, as the revenue driven by online orders will help soften the blow slightly.

What about next week?

In some areas things will get worse, as we expect our larger cities/counties to move closer to shelter-in-place rules that limit all retail traffic and leave just home-essential retailers open to the public. The impact of this policy change will be severe, and sales tax will decline sharply as a result. It is important to understand that although substantial, not all sales tax comes through retail industries. 

In order to get a better of idea of where your sales tax is coming from, go to the industries tab inside ZacTax. This gives you a good starting spot to see the actual impact. 

Also, sales tax runs a couple of months behind so be prepared to not see the impact in April but in May and June depending on how long this continues.

Will we see a bounce-back?

Most experts agree that the economic impact of COVID-19 will be severe, but the length of the economic shutdown will be a major factor in the overall impact. In a best-case scenario, we all come out to sunny Spring weather in two weeks and we see an elastic bounce in consumer spending. 

Also possible, the COVID-19 event will last longer than the next two weeks and jobs losses, along with the loss of small businesses, will lengthen the bounce back elasticity of our sales tax revenues. 

Texas has an incredible economic engine and once things start to bounce back we will begin to be more comfortable with our future revenues. Just hold tight, stay fiscally conservative, and limit unnecessary spending. The next two weeks will tell us a lot.

If you have friends or colleagues that are worried and don't know where to start, we have extended our free trial for 60 days. We do not want any local Texas government to be left with unanswered sales tax questions