Sales tax revenue drops steeply

Shortfall could mean property tax hike

By Greg Elias
Observer staff

Local sales tax revenue fell sharply in the first quarter of 2007, raising the possibility of a property tax hike to bridge a potential budget gap.

Williston collects a 1 percent levy on sales of goods and services, piggybacking on the state’s 6 percent sales tax. The town relies heavily on the local option tax, which funds almost 40 percent of the municipal budget.

So Williston officials were alarmed to learn that revenue from the tax dropped 22 percent for the quarter ending March 31 compared to the same period a year ago. The decrease, from $581,048 to $451,461, is especially startling because same-quarter revenue had increased virtually every time since the town began collecting the tax in 2002.

Though it is impossible to know for sure, the drop likely stems from changes in state law that govern what goods are taxed. Starting at the beginning of the quarter, Vermont exempted some items and began taxing others.

The state also altered so-called sourcing rules, with taxes now based on the purchase’s destination. That means that items bought in Williston but shipped or delivered elsewhere are no longer subject to the local sales tax.

“We assumed there was going to be some loss of revenue,” said Town Manager Rick McGuire. “But we didn’t think it would be this much.”

Vermont tax officials think the new sales tax exemption on clothing may at least in part account for the revenue drop in Williston. Bolstering that theory is the fact that Manchester, home to several factory outlets that sell clothing, saw an even steeper drop in sales tax revenue than Williston.

Michael Wasser, policy analyst with the state Tax Department, said first-quarter receipts for the statewide sales tax have actually increased. In Williston, he thought the new sourcing rules combined with a loss of revenue from clothing sales could have resulted in the big fall in tax collections.

State officials said the decrease might indicate that some taxes collected by businesses during the quarter have yet to be tallied.

“One of the reasons for the apparent drop could be that it’s a matter of one month’s returns are not completely processed,” said Bill Smith, a statistician with the Tax Department. He noted that the month-by-month numbers show local option tax revenue down 12 percent in January, 9 percent in February and a whopping 36 percent in March.

The state had warned towns that levy the local sales tax that they would likely see a drop in revenue when the new rules went into effect, Wasser said. “So it shouldn’t be a surprise, although that doesn’t make it any less painful.”

Williston officials did in fact assume sales tax revenue would level off in the coming fiscal year. The budget calculates that sales tax proceeds will be the same as the current fiscal year, despite the fact that revenue had increased substantially each previous year.

The new numbers put the town in a quandary. The 2007-08 fiscal year budget has already been approved by voters, who were told the $7.3 million spending plan would mean an estimated municipal property tax rate of 22 cents per hundred dollars in valuation.

Voters approve a budget, however, not a tax rate, which is subject to change based on revenue. And change it might if town officials determine the recent drop in sales tax revenue is more than an aberration.

The problem is that the town must guess how much the tax will bring in before setting the property tax rate. By law, the rate must be set by July 1 – well before the town even gets the next quarter’s sales tax results, let alone knows numbers for the coming fiscal year.

“One quarter doesn’t necessarily give you the whole idea about a trend,” McGuire said. “But that’s all we’ve got to go on right now.”

Changes to Vermont’s sales tax rules were made as part of a nationwide effort to standardize collections. The goal of the Streamlined Sales Tax Project is to convince Congress to pass legislation requiring taxes on Internet sales, thus capturing revenue that has eluded states and municipalities.

McGuire said the Selectboard will have to decide whether the new figures indicate that local sales tax revenue will continue to shrink or if the recent numbers are just an anomaly.

The board could draw on budget reserves – an estimated $800,000 for the coming fiscal year – set aside for unexpected expenses or shortfalls. It could raise property taxes. It could use some reserves while raising property taxes by a smaller amount. Or it could do nothing and hope sales tax revenue stabilizes.

Selectboard Chairman Terry Macaig said the board’s reaction to the latest figures was “not to panic at this point.”

The town was conservative in projecting sales tax revenue for the current fiscal year, he said, so there shouldn’t be a shortfall in the current budget. “Where we have a problem is what happens in the next fiscal year,” Macaig said.

He said that raising property taxes should be a last resort. Each penny increase in the property tax rate brings in about $120,000 in revenue.

A yearlong drop in sales tax revenue at a rate similar to the most recent decrease could leave a budget gap of more than $500,000, McGuire said

If the board decides the new figures indicate a larger-than-expected downward trend for Williston’s sales tax, McGuire said “it’s likely the tax rate will be higher than was estimated.”