U.S. retail sales plunged in March because of the COVID-19 pandemic, forecasting a difficult period for states that rely more heavily on sales tax revenue.
The U.S. Department of Commerce released March retail sales numbers showing a decline of 8.7 percent — or $46.2 billion — from February's numbers. The report, released April 15, marks the largest month-to-month drop since the department began tracking the data in 1992.
While total retail sales were down, the largest drop in real numbers came from auto sales, which plunged by 27.1 percent. Restaurant and bar sales were down 26.5 percent, furniture sales were down 26.8 percent, and clothing sales declined by 50.5 percent. Compared with March 2019, retail sales dropped 6.2 percent.
Several industries posted gains: Grocery stores saw a 26.9 percent increase in sales, and sales by non-store retailers, which includes e-commerce, increased by 3.1 percent.
Sales and use taxes account for a little over 30 percent of all state tax revenue, amounting to $255.67 billion, according to fiscal 2018 data from the National Association of State Budget Officers (NASBO).
General sales taxes are the largest tax revenue source in 15 states and account for more than half of all tax collected in Florida, Nevada, South Dakota, Tennessee, Texas, and Washington, according to the Pew Charitable Trusts.
“Furthermore, this morning’s retail sales data illustrates how different this economic downturn is from past recessions. Historically, sales taxes have provided a relatively stable source of tax revenue for states, helping to smooth out the ups and downs from taxing more volatile economic activity such as capital gains, corporate income, or oil extraction,” Mark Robyn, senior officer for state fiscal health with Pew, told Tax Notes April 15.
Robyn noted that sales taxes have been more stable than personal or corporate income, severance, and property taxes in all but four states where sales taxes are levied, which creates challenges for states attempting to stabilize their budgets.
And the slide is far from over.
“As the lockdowns were only introduced in the middle of last month, however, a further big decline is almost guaranteed in April,” Michael Pearce, senior U.S. economist at Capital Economics, wrote in a note April 15.
From 2008 to 2010, states’ overall general fund revenues declined by 11.6 percent, according to Brian Sigritz, director of state fiscal studies at NASBO. Sales taxes declined by 6.8 percent, while personal income taxes declined by 14.7 percent.
“Some states have pretty significant declines, and other states that weren’t seeing the impact in March noted [that] they expect to see declines in April,” Sigritz told Tax Notes. “From past downturns, oftentimes states will see the impact in sales tax revenue before the impact in income tax, due to the frequency with which sales tax data is reported. This time, personal income taxes may see more significant declines from the high number of layoffs and the rise in unemployment claims.”
Approximately 16.8 million people filed for unemployment benefits between March 15 and April 4, with Hawaii, Michigan, Rhode Island, and Pennsylvania seeing the largest increases, according to Department of Labor data released April 9.
Added together, it is an increasingly difficult time for states to be estimating tax revenues and adjusting accordingly, Sigritz said.
In an April paper titled "COVID-Induced Economic Uncertainty" by the National Bureau of Economic Research, authors Scott Baker, Nicholas Bloom, Steven Davis, and Stephen Terry document that the pandemic has created a “massive spike in uncertainty” more similar in magnitude to that of the Great Depression of 1929–1933 than that of the Great Recession of 2008–2009.
Data has started to bear that out: The $46.2 billion drop in retail sales in March nearly matches the $49.1 billion peak-to-trough decline in retail sales over the worst 16 months of the Great Recession, according to reporting from Reuters.