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The Impact of Sales Tax Loss to E-Commerce in the State of Tennessee

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The Impact of Sales Tax Loss to E-Commerce in the State of Tennessee Younger Associates was retained by the Alliance for Main Street Fairness to calculate the economic impact of tax revenue lost due to
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The Impact of Sales Tax Loss to E-Commerce in the State of Tennessee Younger Associates was retained by the Alliance for Main Street Fairness to calculate the economic impact of tax revenue lost due to online retailers who do not collect sales and use tax in Tennessee. This analysis focuses on how the loss of tax revenue to support local and state government services impacts jobs, wages, and other types of local and state tax revenues. Younger Associates is a market research and economic development consulting firm with offices in Jackson and Memphis, Tennessee. Our firm has conducted economic impact analyses for government entities and private businesses across the Unites States for 20 years. Methodology Three primary sources of data were used to determine the economic impact of state and local tax revenue lost as retail purchases shift from local store-based retailers who collect sales and use tax to online retailers who are not required to collect the tax. The sales and use tax revenue loss projections are based upon a study completed in 2009 by the University of Tennessee (UT), State and Local Government Sales Tax Revenue Losses from Electronic Commerce. This study, authored by Donald Bruce, William Fox and LeAnn Luna, forecasts the state and local sales tax losses due to e-commerce for 46 states and three localities. In this study losses are projected through 2012 for both business-to-business and business-to-consumer e-commerce sales. U.S. Bureau of Economic Analysis data was then applied to calculate job losses, and losses in consumer spending due to those job losses. Regional input-output multipliers (RIMS II) specific to the Tennessee economy, and consumer expenditure patterns for the Southeastern region of the U.S. were used in the impact calculations. The remaining data came from Tennessee state government. Tax revenue collections data was obtained from the Tennessee Department of Revenue and wage data was obtained from the TN Department of Labor and Workforce Development. Memphis Jackson, TN Market Research Economic Development Consulting Strategic Planning Findings E-commerce has grown steadily since its inception for a variety of reasons. One factor is the pricing advantage that an online retailer gains over a local store-based retailer by not charging sales tax. In Tennessee the price disadvantage for a local retailer ranges from 7% to 9.75% depending upon the locality of the store-based retailer within the state and whether the item is non-prepared food or a non-food item. The UT study provides a baseline forecast of $410.8 million in Tennessee state and local sales tax revenue losses due to non-taxed e-commerce sales in The study also provides what is termed an optimistic forecast of revenue loss based upon a higher estimate of e-commerce growth. The higher forecast predicts a loss of $456.1 million in state and local sales tax revenue in With the upcoming addition of significant e-commerce capacity within the state, not known at the time of the UT study, the higher or optimistic forecast of e-commerce sales may be more realistic for Tennessee. Tennessee is highly dependent upon sales and use tax revenue to fund government operations and services. In the fiscal year ended June 30, 2011, 61.3% of state tax revenues came from the state portion of sales and use tax. The remaining 38.7% of state tax revenue came from 21 other types of taxes such as franchise, excise, gasoline and privilege taxes. Since the state financial model is built upon sales tax, the loss of sales tax revenue is more detrimental to Tennessee than to states that depend more on other sources of tax revenue such as income tax. To avoid the need for other types of tax revenue or major changes in the financial model upon which the state operates, maintaining sales tax revenue is important to Tennessee. Data tracked by U.S. Bureau of Economic Analysis identify that jobs are supported within Tennessee by each million dollars of spending by state and local governments. If the state and local governments within Tennessee lose $456.1 million in sales and use tax revenue, a total of 6,899 jobs will be lost throughout the state s economy. State and Local Sales Tax Lost $ 410,800,000 $456,100,000 Employment Multiplier Jobs Lost 6,213 6,899 Younger Associates, September A portion of the jobs lost would be jobs directly employed by state and local government. However, much of the job loss would be from indirect and induced job losses that would occur in private businesses if the state is deprived of sales and use tax revenues to spend on providing services. In Tennessee the 2011 annual average wage is estimated to be $43,108. If 6,899 jobs are lost, the total wages lost by Tennessee households would be $297.4 million per year. Jobs Lost 6,213 6,899 TN Annual Average Wage $43,108 $43,108 Total Wages Lost $267,850,404 $297,386,975 When household earnings decline, consumer spending also declines. The reduction in consumer spending due to lost jobs and wages would translate into an additional $16.3 million in sales and use tax revenue losses. The loss of jobs and wages would also trigger losses of other types of state tax revenues as spending on taxable items such as gasoline, vehicles, alcohol, tobacco and amusements decline. Revenues from taxes and fees on businesses would also decline as businesses downsize due to reduced consumer spending. The total reduction in all these other types of state and local taxes would total approximately $8.3 million. Overall, the multiplier effect would translate the direct loss of sales tax revenue on e-commerce sales into a total state and local tax revenue loss of $480.7 million based upon a loss of 6,899 jobs. State and Local Sales Tax Lost on Direct Sales State Sales Tax Lost Due to Lost Wages Local Sales Tax Lost Due to Lost Wages Other Taxes Lost Due to Lost Wages $410,800,000 $456,100,000 $8,668,871 $9,624,811 $6,026,634 $6,691,207 $7,450,621 $8,272,221 Total Taxes Lost $432,946,126 $480,688,238 Younger Associates, September The following table shows the decline in consumer spending by major category resulting from the loss of jobs and wages. All sectors of the economy, not just retail are affected by the loss of sales tax revenue on ecommerce sales. Major sectors such as housing, transportation, utilities and insurance also experience decreased revenues. State of Tennessee Loss of Consumer Expenditures Due to Loss of Wages Consumer Expenditures * Expenditure Category % of Total Expenditures Consumer Spending Income Before Taxes $ 58,641 $ 297,386,975 Annual Average Expenditures $ 45,749 $ 232,007,584 Annual Taxes & Savings 22.0% $ 65,379,391 Food/Groceries 7.6% $ 17,653,247 Restaurants 5.4% $ 12,490,649 Housing/Shelter 18.6% $ 43,227,888 Utilities 8.2% $ 18,971,789 Housekeeping Supplies/Services 3.6% $ 8,301,742 Household Furnishings/Equipment 3.2% $ 7,530,903 Apparel 3.9% $ 9,057,368 Transportation (vehicle, gas, maintenance) 16.2% $ 37,527,730 Healthcare 6.6% $ 15,366,084 Entertainment 5.4% $ 12,510,934 Personal Care Products/Services 1.3% $ 3,007,290 Reading 0.2% $ 431,062 Education 1.8% $ 4,158,478 Tobacco & Alcohol 1.7% $ 3,864,342 Charity 3.7% $ 8,580,665 Personal Insurance 11.0% $ 25,432,644 Miscellaneous 1.7% $ 3,894, % $ 232,007,584 *Based on the 2009 Dept. of Labor Consumer Expenditures Survey for the United States, Southern Region. Younger Associates, September Summary This study does not argue that jobs employed by local store-based businesses are better for the economy of Tennessee than jobs employed by online retailers. It does not draw any conclusions as to whether the presence of local retailers is in any way more beneficial to the state or individual localities than ecommerce. It focuses simply on the impact generated when potential sales and use taxes are lost due to online retailers who are not required to collect the tax on ecommerce transactions. This study finds that the projected loss of $456.1 million in sales tax revenue in 2011 will have the following impacts on the Tennessee Economy: Jobs lost due to diminished state tax revenues: 6,899 Wages lost by households; $297.4 million Decrease in consumer spending $232.0 million Total taxes lost due to sales tax loss and decreased consumer spending $480.7 million It is the loss of potential sales tax revenue due to treating one type of retail differently than another that drives the economic impact on the economy. These losses affect every sector of the state s economy and are not confined to the store-based retailers who lose sales to online retailers. The impact of exempting ecommerce from collecting sales tax is amplified in a state that is highly dependent upon sales tax revenue to provide basic services. Future Projections Online sales are projected to continue to grow and the accompanying loss of sales tax revenue will continue to affect the Tennessee economy. To estimate the future impact of lost sales tax revenue on e-commerce transactions, the historical national rate of online sales growth as reported in the UT study was applied to the Scenario for 2012 sales tax loss. From 1999 to 2011, that study tracks a compounded annual growth rate of 11.25% for national e- commerce sales. If that average growth rate continues, the impact over future three-year and five-year periods is summarized in the table below Three-Year Total Five-Year Total State and Local Sales Tax Lost $1,528,006,266 $2,854,657,755 Jobs Lost (cumulative) 8,538 10,567 Wages Lost $1,034,087,616 $2,010,811,452 Total Taxes Lost $1,613,505,614 $3,020,913,560 Younger Associates, September Calculations and Notes Impact of Sales Tax Lost to E-Commerce Scenario* Scenario* State & Local Sales Tax Lost* $ 410,800,000 $ 456,100,000 Employment Multiplier Jobs Lost 6,213 6,899 Tennessee Annual Average Wage 2 $ 43,108 $ 43,108 Wages Lost $ 267,850,404 $ 297,386,975 State Sales Tax Lost from Wages 3 $ 8,668,871 $ 9,624,811 Local Sales Tax Lost from Wages 4 $ 6,026,634 $ 6,691,207 Total State and Local Sales Tax $ 14,695,505 $ 16,316,017 Other Taxes Lost as Sales Tax Declines 5 $ 7,450,621 $ 8,272,221 Taxes Lost Due to Loss of Jobs & Wages $ 22,146,126 $ 24,588,238 Total Taxes Lost $ 432,946,126 $ 480,688,238 * Scenario titles and tax loss data taken from the 2009 University of Tennessee Study entitled, State and Local Government Sales Tax Revenue Losses from Electronic Commerce. The Scenario would essentially be the Worst-Case Scenario for Tennessee in terms of revenue loss. 1 U.S. Bureau of Economic Analysis, RIMS II final demand employment multiplier, which represents the total change in the number of jobs in all industries for each $1 million of output for government services. 2 Projection based on data from the Tennessee Department of Workforce Development; annual average wage from among all industry sectors in Tennessee for Calculation includes an 3.5% average wage increase for 2010 and The average sales tax rate based on total taxes collected for the fiscal year from the Tennessee Department of Revenue June 2011 Summary of Collections Report. 4 While the Tennessee local option rate ranges from 1.50% to 2.75%, the rate of 2.25% was used for this calculation as this is the rate levied among Tennessee's four most populated cities: Memphis, Nashville, Chattanooga and Knoxville. 5 Other tax revenues lost were calculated using a ratio of sales (local and state) to all other types of taxes collected in Tennessee. This ratio is based upon the July 2010 to June 2011 Revenue Collections Summary Report released by the Tennessee Department of Revenue. Younger Associates, September
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