The Compass: Interim report predicts no area tax revenue relief until late 2010

When it comes to regional sales tax and hospitality tax collections, there is nothing for which to be thankful. Sorry.

According to an interim The Compass report, national economic conditions are likely to make it more difficult for regional county and municipal governments to provide services. Jeff Collins, the economist for The Compass, suggests local economic conditions may not improve until the second half of 2010.

Funded and managed by The City Wire, The Compass is a quarterly regional economic report with data collection and analysis handled by Collins, a nationally respected economist based in Springdale and co-founder of Streetsmart Data Services. The Compass, presented by Benefit Bank, is the only comprehensive economic analysis of the Fort Smith metropolitan area. (Link here for the third-quarter The Compass report.)

INTERIM REPORT
March was the only month in 2009 that sales tax collections in Crawford, Franklin, Logan and Sebastian counties for the first eight months were up compared to 2008. And the March figure of $3.439 million was up just 0.8%.

The four most recent months of sales tax data (May-Aug.) show double digit declines in tax collections from the four counties, with August 2009 combined collections of $3.247 million reflecting a 14.8% dip from August 2008.

“Current year-on-year tax collections at the county level indicate eroding retail activity,” Collins noted in his report. “What can be concluded from the changing rate of sales tax collections is local consumers are responding significantly to national and local economic news. Their response has had and will continue to have serious implications for the ability of local government to provide services.”

Hospitality tax collections in Fort Smith and Van Buren are down, also. For the first nine months of 2009, the Fort Smith collections ($520,528) are down 16% compared to the same period in 2008, and Van Buren collections ($302,803) are down 3.69%.

Fort Smith hospitality taxes are collected from a 3% tax on hotel room rates. Fort Smith hospitality tax collections in 2008 totaled $803,591, 11% more than the $723,548 collected in 2007, and more than 19% above 2006 collections. Hospitality tax collections for Van Buren in 2008 totaled $410,914, up 7.4% over 2007 and up more than 14.5% over 2006. Van Buren collects a 1% tax on lodging and restaurants.

“Both retail as well as hospitality are likely to lag recovery in the national economy, leaving retailers and hoteliers to look to a better than expected holiday season and a tough first half of 2010,” Collins noted in the conclusion of his report.

The Fort Smith Advertising and Promotion Commission recently approved a 2010 budget that anticipates no revenue growth and includes a 6% reduction in expenditures.

THE COMPASS ANALYSIS
Following is the complete written analysis from economist Jeff Collins.

Two-thirds of economic activity is tied to consumption. At the national level, eroding consumer confidence is directly impacting retail sales. At the local level, declining retail activity can impact employment. Moreover, sales tax revenues are the lifeblood of municipal and county governments.

Current year-on-year tax collections at the county level indicate eroding retail activity. It is important to note that there is a lag in the reporting of sales tax collections. It is also important to note that counties with less retail activity demonstrate more volatility in tax collections. This explains the high level of variation in year-on-year percent change for Franklin and particularly Logan County.

What can be concluded from the changing rate of sales tax collections is local consumers are responding significantly to national and local economic news. Their response has had and will continue to have serious implications for the ability of local government to provide services.

Declining sales tax collections also imply poor opportunities for retail and wholesale employment. Year-on-year employment for the Fort Smith Metropolitan Area indicates declining employment related to trade. This trend is likely to continue through the first two quarters of next year and could accelerate if the holiday shopping season is noticeably impacted by sagging consumer demand.

Hospitality related tax collections are indicators of both leisure and business travel.  Moreover, they are strong indicators of the overall health of the commercial real estate sector.

The hospitality industry, as measured by Hotel/Motel tax collections is currently declining. Current national economic conditions are substantially impacting business and leisure travel. These funds are also used to provide municipal services. The decline in hospitality related tax collections coupled with sliding sales tax collections implies municipalities will both be looking to tighten their belts and explore other sources of revenue to fund services.

Comparing the first three quarters of 2009 to 2008 indicates that collections were up slightly in both Fort Smith and Van Buren during Q1 but have since receded. In percentage terms the loss has been more pronounced for Fort Smith hoteliers.

Again, in addition to the tax revenue implications or declining activity, there are also employment impacts from reduced demand for hotel rooms.  This is evident in employment statistics for the hospitality sector which includes hotel workers. Recent data from the U.S. Bureau of Labor Statistics indicates a loss of several hundred jobs in the sector over the last year.

Both retail as well as hospitality are likely to lag recovery in the national economy, leaving retailers and hoteliers to look to a better than expected holiday season and a tough first half of 2010.