As online shopping grows, a sales tax hike becomes less viable
There are two universal truths to bear in mind as legislators in the Connecticut General Assembly negotiate the next fiscal-year budget. One is that every line of every budget of every government in human history has had a constituent. The other is that politicians are like water. They follow the path of least resistance.
In the case of the governor’s proposed budget, Gov. Dannel Malloy wants spending cuts. He does not want to hear the word “tax” after having raised revenues twice in six years. But since every budget line has a constituent, and since constituents have a habit of opposing elected officials who take something away from said constituents, elected officials almost always try to find ways to punt.
This year, punting might be raising the sales tax. Since the sales tax is regressive —it affects the poor the most, because the poor spend more proportionally compared to the not-poor— and since the poor have less political power than the not-poor, elected officials, in raising the sales tax, would be following the path of least resistance.
The above might be sufficient rationale to hike the sales tax if we lived in normal economic times. But we do not live in normal economic times. Our economy is changing so rapidly that the old ways of doing things may prove insufficient or even harmful.
Allow me to qualify. Raising the sales tax from 6.35 percent would increase revenue, but perhaps not as much as lawmakers hope. It’s not because consumer confidence is low. According to the Connecticut Economic Resource Center, 75 percent of residents think that the future is bright, that the worst of the recession is behind us, and that business conditions will improve. So spending is likely to be more robust in the future than it was in the past.
Changed for the worse is how people spend. They are not going to brick-and-mortars as they used to. Indeed, the trend appears to be snowballing, as the once reliable baby boomer generation is adopting the shopping habits of its millennial children. They are increasingly taking their disposable income to online retailers.
The result has been something close to an existential crisis in retail. Once giant companies dotting the suburban American landscape, companies like Macy’s, Radio Shack, Sears and KMart, are collapsing and leaving empty storefronts behind. GameStop stores have closed. JCPenney pulled out of the Connecticut Post Mall in Milford. The Hawley Lane Mall in Trumbull is scrambling for foot traffic after Joyce Leslie, a clothing retailer, recently closed.
Small businesses in malls and shopping centers can turn over without much overall impact as long as anchor chains stay strong. But once anchor chains start closing, malls and shopping centers experience something like a downward spiral. The more people stop coming to shop, the more people stop coming to shop, and so on.
The pattern will only proliferate, so raising the sales tax is not likely to generate as much revenue as it once did. Indeed, it may compound the problem, as it will raise consumer costs for businesses left behind in the rush for online shoppers. In other words, it may drive more people to spend more on Amazon.com while spending less on mom-and-pop retailers in Connecticut.
Plus, state officials are struggling to collect at least $70 million in outstanding sales tax from out-of-state retailers. As it stands, says Commissioner Kevin Sullivan of the state Department of Revenue Services, local businesses “bear the burden of tax collection and the pricing disadvantage of including sales tax” while Amazon doesn’t. It’s safe to say that raising the sales tax will accelerate the pattern.
As I said, raising the sales tax will raise revenue, but all things considered, probably not as much as lawmakers hope. In the past, independent retailers might weather a tax hike as long as the big box chains were strong and brought in traffic to shore up sales. But more big boxes are now standing empty, and more are expected.
So as legislators gather to negotiate the next fiscal year budget, those universal truths come with a twist. Every line of every budget of every government in human history has had a constituent. But the sales tax may no longer be the path of least resistance.
John Stoehr is a lecturer in political science at Yale and a New Haven resident.
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