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Arkansas Taxable Sales – Revised Data for 2010:Q2

“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. 

Source:  Arkansas Department of Finance and Administration, and author's calculations.
Sources: Arkansas Department of Finance and Administration and author's calculations.

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.

Sources:  Arkansas Department of Finance and Administration, and author's calculations.
Sources: Arkansas Department of Finance and Administration, and author's calculations.

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)

Arkansas Taxable Sales up 4% in the Second Quarter

The July General Revenue Report  from the Department of Finance and Administration (DFA) showed that gross receipts collections (primarily sales and use taxes) were up sharply in July– 8.9 percent higher than the previous year and 2.7 percent above the DFA  forecast.   This information implies a surge in taxable sales toward the end of the second quarter of 2010.  

In fact, newly calculated statistics show that Arkansas Taxable Sales rose by 4.0 percent in the second quarter (preliminary*) following a revised 2.6 percent growth rate in the first quarter of the year.  The latest reading represents the third consecutive quarterly increase.

Source: Calculated by IEA using data from the Arkansas Department of Finance and Administration
Source: Calculated by the UALR Institute for Economic Advancement using data from the Arkansas Department of Finance and Administration

The improvement in Arkansas Taxable Sales growth in the second quarter contrasts with national retail sales data, which showed a slowdown in growth.  After increasing at a 2 percent rate in the first quarter, U.S. Retail Sales rose by only 1 percent in the second quarter.  As illustrated in the chart below, Arkansas Retail Sales have increased by a total of 7.6 percent over the past three quarters of growth, while U.S. Retail Sales have increased by only 6.8 percent over four quarters of growth.  The turnaround in Arkansas sales growth lagged the rest of the nation, but the most recent data on Arkansas Taxable Sales suggests that Arkansas is rebounding more quickly.

Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, UALR Institute for Economic Advancement.
Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, UALR Institute for Economic Advancement.

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 data is available here:  Arkansas Taxable Sales data (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for July 2010, and will be updated when information becomes available.

Arkansas Taxable Sales – Update

As noted in a recent post announcing Arkansas Taxable Sales for the first quarter of 2010, the initial data are preliminary until after more detailed statistics are published by the Department of Finance and Administration (DF&A).  With the release of Arkansas Fiscal Notes for April 2010, revised figures are now available.

The final data show a slightly smaller sales figure for the first quarter, with a downward revision amounting to only 0.25 percent.  The final data still show a strong gain in the 2010:Q1, up 2.1% (seasonally adjusted).  This follows a 1.0% gain in the fourth quarter of last year.

TextBox2010Q1

The release this morning of the monthly general revenue report for May also provides information to update the monthly series with preliminary data for April 2010.   These estimates show that  Arkansas Taxable Sales in April were up 1.7 percent from March (seasonally adjusted).  Although these data are based on preliminary and incomplete information, it would appear that retail sales were off to a strong start in the second quarter of 2010. 

Arkansas Taxable Sales statistics are constructed by the Institute for Economic Advancement using tax collection data from the Arkansas Department of Finance and Administration. Data for April 2010 are preliminary.
Arkansas Taxable Sales statistics are constructed by the Institute for Economic Advancement using tax collection data from the Arkansas Department of Finance and Administration. Data for April 2010 are preliminary.

 Updated and revised data are available in Excel spreadsheet form by clicking here.

Arkansas Taxable Sales

A new indicator of economic activity for the Arkansas economy

Retail sales statistics for the U.S. economy are regularly compiled by the Census Bureau.  However, there is no readily-available, timely source of data for retail sales on the state level.  One approach to filling this gap is to use state sales tax collections as a measure of taxable sales.   In principle, the approach is quite simple:  Taxable sales = Sales tax collections/tax rate.  In order to extrapolate sales statistics from tax data, however, it is necessary to consider the coverage of the tax, changes in tax law, and the timing of state revenue collection relative to the underlying sales.

Arkansas has four separate sales taxes imposed on a common base:  a general sales and use tax of 4.5 percent, a tax for the educational adequacy fund of  0.875 percent, a property tax relief tax of 0.5 percent, and a conservation tax of 0.125 percent (for a total tax rate of 6.0 percent).  Each of these taxes could conceivably be used to identify overall sales activity.  However, recent changes in tax structure complicate matters.  In particular, the tax rate on grocery purchases was lowered from 6.0 percent to 3.0 percent in July 2007, then lowered again to 2.0 percent in July 2009.  When these tax cuts were adopted by the state legislature, the associated revenue reductions were specified to be subtracted from three of the four specific taxes, in proportion to their relative rates.  As a result, these three taxes (general sales and use, educational adequacy, and property tax relief) no longer represent a constant fraction of total sales–rather, they represent a weighted average of taxes on non-grocery items (at the statutory rate) and taxes on groceries (at a lower rate).  Only the 1/8-percent conservation tax remains at its statutory rate.  (The conservation tax is not affected by recent tax law changes because it is written into the state constitution.)  The conservation tax is therefore a unique candidate for use in estimating the underlying tax base.

A second important factor for deriving sales information from tax collection data is the timing of tax receipts relative to the  sales being taxed.  Tax laws in Arkansas impose different requirements on different sized businesses.   Some larger firms can choose to pay estimated taxes for the current month, while some smaller firms are required to file and pay only quarterly or annually. For most business, however, the key deadline comes on the 24th day of the month.  On that date, final statements and payments for taxes owed in the previous month are due.

The tax payment deadlines suggest that revenues received by the state during a month primarily reflect taxable sales from the previous month.  An examination of the raw data supports this timing convention.  For example, when the special conservation tax was implemented in 2001—and again when the earmarked educational adequacy tax was introduced in 2004—revenues received in the first month of implementation were a very small proportion of subsequent months.  The seasonal pattern of sales tax receipts is also indicative:  The most prominent recurrent peak in tax receipts occurs in January, one month after the December retail sales peak.  As the payment regulations indicate, tax receipts reflect a mix of taxable sales from current and previous months.  Nevertheless, the best practical estimate seems to be a simple one-month lag.

So, using receipts from the conservation tax and adjusting the timing to reflect the one-month collection lag, we can calculate a measure of taxable sales.  Monthly data for this series are illustrated in the figure below:

Arkansas Taxable Sales

 Although there is a great deal of month-to-month variability in this measure, recent observations suggest that sales activity reached a low point around mid-2009, with signs of recovery since then.

In interpreting the data, a number of caveats should be considered:

  • The series is labeled “taxable sales” rather than “retail sales” because Arkansas sales and use taxes apply not only to retail transactions, but also to some business-to-business transactions.
  • Some of the monthly variability in the series can be attributed to specific institutional factors in the tax collection process.  For example, the rather sharp upturn observed for December 2009 (reflecting tax collections in January 2010) was partly attributable to “one-time gains from audit payments” [see General Revenue Report for January (FY 2010)].
  • Another previous change in the tax structure should also be mentioned:  in 2004, with the introduction of the educational adequacy tax, the sales tax base was broadened.  Although there is no evident break in the path of total tax revenues, this consideration warns against making direct comparisons between post-2004 and pre-2004 data.  (The expansion of the tax base accounts for a revenue increase of only about 0.5 percent.)
  • The most recent observations in the series should be considered preliminary.  Data for the conservation tax are not explicitly reported in the General Revenue Reports, but are available in the publication Arkansas Fiscal Notes, which is available a few weeks after the initial report.  Until the publication of Arkansas Fiscal Notes, the change in general gross receipts is used as a preliminary approximation.

Given some of these considerations, it is best not to focus on very short-term changes in the data.  The chart below shows the results of averaging the data over calendar quarters.  The chart juxtaposes Arkansas Taxable Sales with a quarterly measure of  U.S. retail sales.

Sources:  U.S. Census Bureau, Arkansas Department of Finance and Administration, Institute for Economic Advancement.
Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, Institute for Economic Advancement.

A comparison of the measures for Arkansas and the U.S. reveals an interesting pattern:  Sales in Arkansas reached a peak about one quarter later than the U.S., and experienced sharp declines with a similar lag.  Moreover, the percent change from peak to trough is smaller for the Arkansas data than for the U.S.  This pattern is consistent with the notion that Arkansas’ economy was dragged into recession by economic weakness in the rest of the country.  Both measure show increase toward the end of 2009, confirming the general observation that both the national and Arkansas economies are beginning to recover from the recession of 2008-09.

Another Round of State Budget Cuts

Governor Beebe announced another round of state budget cuts this morning.  The cutbacks total $106 million of spending, amounting to about 2.4% of the state’s budget.  Today’s announcment followed last week’s report from the Department of Finance and Administration (DF&A) that showed state revenues continuing to fall short of expectations.

For the first six months of the 2010 fiscal year (July-December 2009),  gross general revenues were down $80 million– about 3 percent–from the previous year.  More important, gross revenues were 1.9 percent below DF&A’s forecast.  As shown in the chart below, gross revenue has shown some signs of a comeback in recent months.  However, the rebound is not as large as was anticipated in the state’s revenue forcast (as revised in October 2009).

Gross General Revenues
Source: Arkansas Deparment of Finance and Administration. Seasonal adjustment by the Institute for Economic Advancement

Gross General Revenues measure the total income for the state.  A more important measure for the budget is known as Net Available Revenues, which is equal to gross revenues minus some specific budgetary obligations (including tax refunds, bond payments, earmarked education funds, etc.).   Net available revenues measure the resources that are available for funding ongoing state government operations.  According to the DF&A report last week, net revenues for the first half of FY2010 were $37.7 million (1.7 percent) lower than in the previous year, and were 2.4 percent lower than the DF&A revised forecast. 

This second round of budget cuts for FY2010 should be sufficient to keep the state’s finances in balance.  As is clear in the chart above, however, a large share of the state’s revenues arrive in the second calendar quarter of the year (the last quarter of the fiscal year).   Consequently, we should have a much clearer picture of the state’s budget situation for FY2010 after income tax returns are filed in April.

Selected news coverage about the budget cuts:

State Revenue Woes (?)

Governor Mike Beebe announced today that he had “accepted a recommendation by the Arkansas Department of Finance and Administration to cut the state budget by $100 million for the current fiscal year.”  This amounts to a budget reduction of  just over 2 percent.  The background to this announcement was a report from the Department of Finance and Administration (DF&A) earlier this month that showed that Arkansas tax revenues were sharply lower than expected in the first quarter of fiscal year 2010 (July-Sept 2009).

Year-to-date gross general revenues were down by 7.2 percent from the previous year, and were 6.4 percent below the general revenue forecast.  Net available general revenues were down 3.3 percent from the previous year and 7.1 percent below forecast.  The report noted that “in percentage terms Corporate Income is below forecast the most (-22.1 percent [-$19.9 million]), but Gross Receipts [sales taxes] are down by a greater amount in dollar terms (-$61.6 million [-10.8 percent]).”

These declines are disconcerting, especially in the context of recent signs of renewed growth in the Arkansas economy.  However, there are reasons to believe that this is a temporary problem and that state revenues will recover sufficiently to meet revised revenue projections in the latter part of the fiscal year.

  • First, tax revenues are recorded by DF&A in the month that they were received, rather than in the month that the tax liabilities were incurred.  Reporting and payment lags mean that revenues received in the July-September period reflect economic conditions earlier in the year when the recession was having a greater impact on the economy.  Recent signs of stabilization should show through to revenue receipts in coming months.
  • More important, as the economy recovers from the recession in coming months, economic activity will pick up — further expanding the tax base and revenue receipts.

The depth of the nationwide recession and its impact on the Arkansas economy were more severe than anticipated.  Consequently, state revenues will be lower than earlier expected.  With prospects of an improving economy on the horizon, however, a modest 2 percent reduction in annual revenue projections and budgetary authority should be sufficient to correct the state’s budget imbalances.  As Governor Beebe put it, “Just like any family or business, state government must live within its means.”  His response to unexpectedly sharp declines in revenue is a prudent fiscal adjustment.

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