Sales Tax – How Much is 10% Down

Now that's we've looked at the tax structure of Neosho, we can start to understand what it means when revenues are up or down during a certain period.  As a refresher, Neosho operates primarily off of a sales-tax revenue base.  The city’s tax rate is 2.5% on retail sales and is a portion of the 7.6% sales tax rate you and I pay on most things we buy in Neosho.

Retail Base

By doing some simple math from the budget, the 2.5% sales tax backs into a taxable retail base of roughly $200 million annually.  That means that between Wal-Mart, Lowe's, and every other business that sells products, food, etc. in Neosho, they collectively sell around $200 million worth of ‘stuff’ every year.

So with those numbers, we can now say that Neosho will collect around $5 million in sales tax this fiscal year ($200 million x 2.5%).  That sales tax goes to pay for everything from light bulbs to bridges, from payroll to pavement, and everything in between.  As listed in the previous blog posting, there are a number of different taxes that add up to the 2.5% total.  Each tax should be accounted for in the books of the city and, typically, cannot be mixed with other taxes or used for purposes other than their statutory description.  (That means that taxes collected for fire protection should not be used for parks and recreation, etc.)

What a Percentage Decline Means in $$

So during times of economic slowdown like we are living through right now, the paycheck the city receives from tax payers (in the form of sales tax revenue) is lower.  If our revenue expectations are down 10%, that number approximates a $500,000 reduction in city sales tax revenues annually. 

And since things like debt payments (which Neosho pays around $1.5 million annually) can’t be cut in the short run, it’s not as simple as just cutting expenses across the board.  Some expenses cannot be cut (banks won’t accept lower payments on debt just because taxes are down) and others areas wind up taking a larger cut to balance a reduction in revenues.

If a city had a blend of sales and property tax, the impact of slower retail sales may be lessened since property taxes don’t typically see the same volatile swings.  That’s a reason I would recommend the city, as some point, look into a blended tax base.  That option falls outside the scope of this discussion.

It’s also important for cities to keep a 2-3 financial reserve in place to help offset the effects of a temporary slowdown in retail sales.  Neosho did not have this level of reserve in place.  That will need to be addressed in the future.

Summary

So now that we’ve looked at revenue sources and some rough numbers on annual revenues, I hope you have a clearer understanding of why any city with a sales-tax-based revenue stream suffers more during a time of economic slowdown.  And without sufficient reserves in place to handle these slow downs, that leads to pay cuts, layoffs, and a number of other issues that we are all living with today.

Next time, we’ll take a look at some sizable capital projects that have occurred over the past few years.  Those include renovations of the Civic/Senior Center, Howard Bush Drive Extension, South Street Overpass, and La-Z-Boy drive.  Specifically, we’ll look at how these projects contributed to the cash-flow problems we’re seeing today.

Until next time…stay warm!