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Tulare Feels Gas Pains

Tulare Loves station

Tulare Loves station

Lower Fuel Prices – Good For Consumers But Bad For Cities’ Sales Tax Revenues

Other Big Sales Tax Trends Point To Possible Need For New Taxes

January 28,2015

Those lower gas and diesel prices are great for consumer pocketbooks  including the good people of Tulare. But in a city where 22% of all sales tax revenues come from fuel sales, a 40 to 50 percent drop in in fuel prices is throwing a big monkey wrench in the City of Tulare’s budget.

Tulare finance chief Darlene Thompson reports the city sales tax  increases this past year have been great – exceeding budget expectations by $500,000 as of June 30, 2014.

But in a budget message to be delivered to the Tulare City Council January 30, Thompson says a 40% drop in fuel prices means the “city sales tax budget could be some $650,000 lower” than estimated in the 2014-2015 city budget. That budget anticipated around $14.2 million in sales tax revenue.

Motor City

Tulare is ‘Motor City’ with a dependence on petroleum sales that is much bigger by percentage than many cities because it is a Hwy 99 town with several truck stops and scores of gasoline vendors. More than that, Tulare is also home base for seven trucking companies – some like Knight Transportation with big fleets. Add to that the fact Tulare is the milk production capital of the US with a gaggle of trucks filling up daily to both fetch and ship milk far and wide.

By contrast,right next door,the City of Visalia’s gasoline sales make up about 10% of their sales tax revenues says city Finance Director Eric Frost.

With $27 million in its sales tax fund, almost double what Tulare has to support city services, Visalia expects a $500,000 to $600,00 hit from lower fuel prices prices figuring it at a 50% decline in price says Frost. That’s a big number but smaller by percentage than Tulare.

Gasoline is selling for $2 a gallon today at one Tulare station compared to around $4 last spring.

Trend Is Not Your Friend

But beyond gas, there are plenty of other reasons to worry about future sales tax says Frost,pointing to trends all California cities might want to pay attention to.

This past week at the Visalia City Council retreat, Frost pointed out that the city enjoyed a “nice bump” in sales tax revenue after the recession – up around 8% annually. “But now that has slowed to a 2 to 3% growth” he says.

In Visalia sales sax represents 46% of the General Fund’s revenues.

Since the recession, sales tax revenue to the city has improved with 2007, before the recession, coming in $23.3 million. Since the rebound  it has climbed to $26.8 million as of 2014. Visalia enjoys a regional effect and per capita, Visalia collects 67% more than its per capita share as shoppers come to town to trade for soft goods on Mooney and buy at the new car dealerships.

Still,significant trends are pointing downward besides those lower gasoline sales, a trend that after all – could reverse tomorrow!

They include increased per capita spending in California on items and services that are not taxable like healthcare and the Cloud. The Cloud is taking the place of computer-related hardware sales we use to buy at the local store,for example.

“The two big trends that cause us concern is that internet sales have grown from 2% to 12% of all sales with the trend likely accelerating” says Frost. “There continues to be an exemption for internet sales.”

“Secondly, expenditures on items and services that are taxable have gone from 50% to 30% of all spending.”

Frost’s presentation adds that “ millions of Americans are abandoning stores faster than retailers expected” – a trend that does not sound good for Mooney retail.(see retail chart)

On top of all this, some cities like Dinuba have forged sales tax agreements to capture, for example, all Best Buy Electronics internet sales at their distribution center location, something the League of Cities suggests the legislature might want to ban.

What is the bottom line?

Frost’s report says says reduced sales tax revenues will lead to policy choices as some communities decide they need new revenue options.

This may lead some cities to propose new taxes,likely a general tax that requires only a simple majority. These measures pass in California elections about two thirds of the time.

Retail 2015-01-27 at 9.57.23 AM

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