Something’s wrong with the state sales tax. When total tax collections last year rose 4.9% to $12.6 billion (b), and corporate (+14.1%) and individual (+7.0) income taxes grew even faster, the sales tax lagged (+0.8%).

Whatever is dogging the tax is not new (see graph). During the 1987- 2000 period, collections grew at least 5.0% every year, except one, recessionary 1991; and, even then, revenues grew more (2.2%) than now. By comparison, since 2000, sales taxes have increased more than 4.0% only once.

More troubling is the widening gap between annual growth in sales tax collections and in personal income. Historically, the two have moved together. In fiscal 2004, sales tax collections grew faster than personal income (4.3% vs. 2.9%). Since then, however, the reverse has been true (see dashed lines representing income growth in graph). In fiscal 2006-07, sales taxes increased only 0.8%, while 2006 personal income rose 5.3%.

Weakness in the sales tax is even more apparent when figures are adjusted for inflation. Resulting "real" collections were down 0.3% to 0.5% during the first three years of the new decade. And the weakness of the past two years is even more clear: -1.1% and -2.4%, respectively. As recently as 1999, real collections jumped 6.1%.

Internet impact grows

Sales taxes are rising more slowly than personal income, other state taxes, and sales tax collections from prior years. Earlier this year, the sales tax was the only major state tax that did not equal or surpass projections.

The widening gulf between growth in personal income and sales taxes that has occurred in recent years suggests one explanation: Internet sales. A University of Tennessee (UT) study estimated that, in 2003, the Badger State lost $264 million (m) to $275m in sales taxes due to "e-commerce," or at minimum 7% of sales taxes that year. UT researchers also projected state losses of between $365m and $572m by 2008, or between 8.5% and 13.2% of forecasted sales tax revenues.

When consumers have more income to spend, or when they feel wealthier due to the appreciating value of their chief asset, their home, they are more apt to make new purchases. Yet, current economic events have put a damper on growth in both income and savings.

First, Dow Jones reports that the price of a barrel of oil was $30.33 in October 2003. This October, it was $86.20 and has since soared toward $100. More discretionary income devoted to gas for driving or fuel oil for home heating translates into less money available for other purchases.

Second, with the weakened housing market, fewer homes are being built. According to the Census Bureau, building permits in Wisconsin totalled just under 40,000 in 2004 but dropped to 27,300 by 2006. More recently, the National Association of Realtors found that the median (half higher, half lower) price of an existing home in the Midwest had dropped 2.2% between mid-2006 and mid-2007. Less construction translates into fewer purchases of appliances, furniture, and other items a homebuilder or homeowner needs. Likewise, if an owner has less equity in a home, the net effect is a drop in household wealth, which in turn can mean less buying and less borrowing.

Sales Taxes, 2006:  Top 15 Categories

$m Collected and Pct. Chg. over 2005

The dual economic shocks associated with oil and housing were evident in state sales tax collections as early as 2006. The table above displays the 15 business categories generating the most sales taxes. Note that six were already declining and that two others were flat. In one way or another, most of these categories were related to energy, housing, or weak household finances. For example, sales taxes from vehicle purchases fell almost 5% between 2005 and 2006, while collections from home furnishings and accessories fell 0.2%.

After the individual income tax, which is expected to generate $6.76b this year, state government is most reliant on the sales tax. The sales tax is expected to yield $4.31b this year and account for a third of all state general fund tax revenues.

With a "paper balance" of less than $5m, the new 2007-09 state budget is counting on sales tax growth of 3.6% this year and 3.9% next year. Thus, the state is expecting $472m in new sales tax revenue during this biennium.

Given that collections have increased more than 3.6% only once in the past seven years and given that annual growth rates have slid for four straight years (from 4.3% to 3.6% to 2.2% to 0.8%), the present and future health of the sales tax would appear in doubt.