“Sales rose by 3.0 percent, rather than the 4.0 percent previously reported.”
The reason: “Grocery sales, as a percent of total sales, dropped sharply in June. This could actually be a positive development.”
The preliminary estimate for second quarter growth of Arkansas Taxable Sales (ATS), announced in a previous post, was based on information from the July 2010 General Revenue Report from the Arkansas Department of Finance and Administration (DFA). With the recent release of more detailed information in the DFA publication Arkansas Fiscal Notes, a revised estimate of ATS shows a somewhat smaller increase in the second quarter of 2010: Sales rose by 3.0 percent, rather than the 4.0 percent previously reported.
The downward revision is disappointing. But as shown in the chart below, it doesn’t really change the qualitative interpretation of second quarter data: Sales accelerated in 2010:Q2 and have risen significantly since the apparent trough of 2009:Q3.
Investigation of the reason for the downward revision in ATS reveals an interesting observation: Grocery sales, as a percent of total sales, dropped sharply in the June. This could actually be a positive development.
Preliminary estimates of ATS are based on gross receipts, which primarily reflect total sales tax collections. But total sales taxes represent a mix of taxes on groceries (at a current tax rate of 2 percent) and taxes on non-groceries (at a tax rate of 6 percent). Changes in the mix of these two categories alter the effective tax rate on total sales.
The revised figures for ATS are based on data on receipts from the Arkansas Conservation Tax. Because it is written into the Arkansas constitution, the Conservation Tax was not altered by reductions in the tax rate on groceries in July 2007 (from 6 percent to 3 percent) and in July 2009 (from 3 percent to 2 percent). Instead, the lower sales tax on groceries is reflected in proportional reductions in the other three components of Arkansas’ Sales and Use Tax (the General Sales Tax , the Educational Adequacy Tax, and the Property Tax Relief Tax).
When groceries decline as a fraction of total sales, these three taxes show a disproportionate increase in overall tax receipts (because a larger share of sales are taxed at a higher rate). The preliminary ATS estimates (which are implicitly based on the assumption of a constant share of grocery sales) would therefore overstate the increase in total taxable sales if this were the case.
This appears to be exactly what happened in June. By comparing changes in tax receipts from the conservation tax with receipts from the other sales tax components, it is possible to estimate the share of grocery sales as a proportion of total sales (see technical note). The results of this estimation are shown in the chart below. Before the national recession began at the end of 2007, groceries constituted about 6 percent of total sales. This proportion rose during the early stages of the recession in 2008, and increased sharply at the end of the year when the financial crisis intensified the economic downturn. Estimates for June 2010 show a sharp decline, from about 12 percent to just over 8 percent.
Economic theory distinguishes goods by the responsiveness of their demand to changes in income. Some basic grocery items are considered “inferior goods,” reflecting the fact that fewer are purchased as income increases (in favor of higher-quality goods). In general, groceries are considered “normal goods,” for which demand increases when income rises, but typically less than one-for-one. In contrast, some goods are considered “superior goods” or “luxury goods,” for which demand increases in greater proportion to income.
The observation that grocery sales increased as a percent of total sales during 2008 and into 2009 is therefore consistent with a downturn in household income during the recession. The recent decline in the grocery sales suggests that households are increasing their purchases of superior goods relative to normal and inferior goods. This provides indirect evidence of higher household incomes (or at least expected incomes).
This observation is supported by data for only one month, so it should be taken as conjectural. However, it suggests that the downward revision in ATS for the second quarter is not unambiguously bad news.
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The Arkansas Taxable Sales series is calculated by IEA to serve as a timely measure of Arkansas retail sales. The series is derived from sales and use tax data from DFA, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.
A spreadsheet of the most recent data is available here: Arkansas Taxable Sales data (Excel file)