What’s up with the sales tax?

Sales tax receipts normally behave like you’d expect them to: They rise when the economy is expanding, and fall when unemployment spikes. Data from across the country show that, historically, sales taxes track the business cycle closely. Over the past decade, though, the Massachusetts sales tax became decoupled from the state’s economy. Some revenue has been lost to Internet-based retailers, but state-specific factors like sluggish employment growth and steep housing prices deserve a far greater share of the blame.

Mass. sales tax losing ground

In Massachusetts, sales tax receipts grew in concert with wages during the 1990s, and then fell during the recession of 2001 and 2002. Sales tax receipts across the country rebounded with the business cycle, but that didn’t happen in Massachusetts. The state economy expanded and unemployment dipped, but sales taxes stayed flat. This flattening coincided with the shift to forward-funding of  the MBTA. The sales tax represents the T’s biggest dedicated revenue stream, and the failure of the sales tax to even keep up with inflation has exacerbated the agency’s financial woes.

The pamphlet the T handed out at fare hike hearings this spring devoted a page to what the T called the “chronic underperformance” of the sales tax in the forward-funding era. It has grown at 1 percent per year since 2000, after rising at a 6.5 percent annual clip the decade before. The numbers get ugly when adjusted for inflation: Between 1992 and 2000, the real growth of sales taxes in Massachusetts outpaced the country at large by more than 20 percentage points. But from 2000 until 2008, the year before the Legisla­ture hiked the sales tax rate by 25 percent, real sales tax receipts in the state shrunk by 13 percent, compared to a 22 percent growth rate across the country. Except for 2010, when a higher rate drove higher receipts, real sales tax revenues in Massachusetts peaked in 2001.

The state’s slow population growth accounts for some of this disparity. But even after controlling for population growth, Massachusetts sales tax receipts still trend downward, and lag the rest of the country. Between 2000 and 2008, state and local sales tax receipts in the US rose 4 percent on an inflation-adjusted, per capita basis; in Massachusetts, they dropped by 12 percent.

Internet spending isn’t a major culprit, either. According to the US Census Bureau, just 4 percent of US retail sales in 2009, the last year for which data is available, occurred online. A 2009 University of Tennessee study estimated that Massachusetts loses 2 to 3 percent of its potential sales tax revenues to Internet sales. Between 2000 and 2008, California, Illinois, and North Carolina all saw their sales tax receipts jump on an inflation-adjusted, per capita basis. None of those states were collecting sales taxes on Internet sales, but their sales tax was growing, while in Massa­chu­setts it was shrinking.

Northeastern University economist Alan Clayton-Matthews puts some blame on high housing prices and slow population growth. “Housing prices here were way out of line with the rest of the country, and a lot of discretionary sales are tied to the real estate market,” he says. High housing prices constrained families’ disposable income. Housing prices also constrained new household formation in the state, and when new households don’t form, they don’t buy furniture and hardware and other taxable items.

Andrew Bagley, director of research at the Massa­chu­setts Taxpayers Foundation, believes the sales tax has suffered because Massachusetts never regained all the jobs it lost in the 2001 recession. When the economy was on the upswing, he says, the state saw no real job growth; the most recent recession, he says, has “decimated consumer spending, and consumers are deleveraging.” Bagley says the sales tax will continue to “lag in growth,” making the state budget more dependent on income taxes. That also means the T shouldn’t expect a big revenue bump any time soon.