The state sales tax revenue data for 2020 reflect unexpectedly robust March revenue, and a slightly weaker April than in some recent years. While headlines have focused on the April slump as a sign of the impending fiscal apocalypse, I will try to unpack the March revenue with an eye toward one of its likely sources and why that source may signal continued economic polarization in Connecticut.
On March 20, two weeks after the first COVID-19 case was confirmed in the state and two months after the first case was diagnosed in the country, Gov., Ned Lamont ordered about 11% of all Connecticut businesses closed. The affected stores included thousands of retail enterprises that collect and turn over sales taxes to the state.
Sales tax revenues collected in March surged to a level over 156% of the average of the March tax hauls of the three prior years. Some of this unusual rise was, no doubt, attributable to the hoarding behavior by consumers we all saw upon the arrival of the pandemic to our fair state. Some of it was likely the result of increased retail prices on items in suddenly short supply. There is, though, another sales tax channel, recently adopted into law in Connecticut, and not funded by everyone. It is probable that a substantial amount of additional revenue came from taxes generated through online sales.
While Amazon has been collecting sales tax from Connecticut customers since 2013, it wasn’t until the Supreme Court handed down the Wayfair decision in June of 2018 that the states obtained broad authority to impose taxes on sales over the internet. In December of that year, Connecticut began requiring the largest internet retailers to collect the tax. Sales tax revenues for the calendar year in 2019 were over 11% higher than in 2017 and about 2.6% higher than 2018. Some portion of the additional sales tax revenue received in March of this year undoubtedly came from taxable sales conducted over the internet when the pandemic had already reduced our willingness to travel or gather closely.
The jump in March sales tax revenues represents a dramatic expression of the income polarization that plagues our state more profoundly than anywhere else in the country.
Not everyone had that choice. About 11% of Connecticut residents have no access to the internet. About 6% of Connecticut residents are unbanked, that is, they have no access to banking, including credit and debit cards, check cashing, and cash depository services. These are essential tools of online shopping. The average annual household income of these unbanked households is just over $21 thousand.
In addition to the administrative expenses to which the unbanked are exposed, they are also effectively unable to shop around for competitive prices. It is safe to conclude that any spike in pandemic internet shopping was fueled almost exclusively by households in other than the lowest income quintile. Trade publications report that online shoppers purchased 35% more groceries and 181% more luxury goods that way in the midst of the pandemic.
The price of those same groceries went up 2.7% from March to April of this year and rose 4.1% over last April. By way of perspective, grocery prices went up .4% in 2018. That was the first increase in three years. This recent steep price increase had a particularly painful impact on lower income households.
The income gap has been growing more egregious over time. In the two decades through 2018, the national median income of households in the lowest quintile rose 49.4%, while non-discretionary expenses (food, shelter, clothing, health care, etc.) rose 58.7%, or about 120% of income growth. The median income of the top 5% of households rose 87.4%. This cycle compels lower income households to sell assets, forgo saving, and take on debt, just to stay alive, reducing the chance of ever rising above that economic ceiling.
The jump in March sales tax revenues, then, while good news for the public treasury, represents a dramatic expression of the income polarization that plagues our state more profoundly than anywhere else in the country. Wealthier households were able to increase their purchases at will during isolation and make those purchases through means not available to others. Scarcity and ruinously higher prices marked the province of those without the tools to escape the walk-in marketplace. To make matters worse, it is likely that many brick-and-mortar stores will not reopen, reducing the vitality of their former neighborhoods.
Community leaders have a responsibility to be aware of the insidious and divisive influence of income polarization and to help establish tools to help overcome it such as job skills training programs, infrastructure initiatives like universal internet access, and recruitment of employers by the quality, and not merely the quantity, of the jobs they provide. Silence is not an option.
Dan Smolnik is a tax attorney and a member of the Hamden Economic Development Commission. The opinions expressed here are exclusively his own.