Downvalley towns face sales tax strain
Eagle, CO Colorado
Like many Colorado towns, Eagle and Gypsum rely heavily on sales taxes to keep their local governments afloat.
Sales taxes account for at least half of the revenue both towns bring in each year.
In Eagle, officials had projected that sales taxes would account for 61 percent of town revenues for 2009. And in Gypsum, sales tax accounted for 48 percent of the $8.96 million in revenues it received in 2008.
“Just the way Colorado’s set up, it’s the life blood of our community,” Gypsum Town Manager Jeff Shroll said.
But what happens when the flow of that life blood slows?
Thanks to the economic recession, Gypsum has experienced a 12-percent drop in sales tax revenue. The town collected about $2.26 million in sales taxes between January and the end of April of this year, compared with $2.58 million during the same time period last year, town finance officer Mark Silverthorn said.
Likewise, Eagle reports a 10 percent drop in sales taxes revenue. The town brought in about $708,000 during the first quarter of this year (January through the end of March) compared with $788,000 during the first quarter of 2008.
In both towns, officials have been forced to cut expenses to account for the sales tax shortfall.
In Eagle, two positions remain vacant including a planner and a police officer. And town manager Willy Powell said that if the sales taxes continues to dip, the town might consider imposing furloughs on employees in an effort to avoid layoffs.
In Gypsum, officials left a building inspector position vacant. They also refrained from adding new positions and kept road improvement projects to a minimum for this year.
“We took out a half million dollars out of our budget, out of our revenue side in sales tax, because we could smell the economy wasn’t going well, and on top of that we also knew the airport was going to be shut down for six months, which has a significant impact to our sales tax budget,” Shroll said.
And if the sales taxes continue to drop, Gypsum officials could scrap building a maintenance facility and postpone road projects like widening a railroad bridge over Highway 6, Shroll said.
Historically, sales taxes have been a reliable source of revenue for Eagle and Gypsum – both towns say sales tax revenue had steadily risen for years before the recession struck. In Eagle, sales tax revenues have been climbing for the past 25 years, and in Gypsum the revenue has been growing since at least 1999, Silverthorn said.
Yet the recent dips in sales taxes have highlighted a downside to this tax: it is highly vulnerable to downturns and upswings in the national economy.
“It’s tied to it. It is vulnerable,” said Bret Waisanen, a fiscal analyst with the National Conference of State Legislators. “If you have a consumer-based economy, if you have a downturn in the economy, or people aren’t confident about spending or they’re holding onto their pocket books, consumer behavior gets reflected in the sales tax.”
Given that, what can towns do to protect themselves against drops in sales tax revenue? Will sales tax be a reliable source of income for Eagle and Gypsum in the future? And should towns look to alternate sources of income to replace the sales tax?
Colorado is one of many states where individual towns can charge sales taxes – and most towns here do, said Mark Couch, a spokesman with the state department of revenue.
Both Gypsum and Eagle charge a 4-percent sales tax on things like food and retail merchandise. The state also levies a 2.9-percent sales tax, while the county charges a separate sales tax.
In both towns, sales tax revenue covers general operating costs like employee salaries, police services and building projects. In Gypsum, 1 percent of the money flows to debt service payments for the Gypsum Recreation Center.
Gypsum brings in the bulk of its sales taxes from retail stores like Costco and the Eagle County airport, where things like car rentals, fuel and souvenirs are subject to sales taxes.
In Eagle, grocery store sales, building materials and restaurant and bar business props up the sales tax.
Ron Throupe, a professor of real estate with the University of Denver, said one way towns could protect themselves against dips in sales taxes is to track the average amount of revenue sales taxes have historically produced each year.
During upturns in the economy, towns should place any extra sales taxes they generate above that average into a reserve account, he said.
In Gypsum, officials have saved up $4.6 million in sales for the Gypsum Recreation Center, enough money to cover more 10 years worth of debt service payments on that facility, Shroll said.
Considering that sales taxes fluctuate, are there more dependable sources of income towns can turn to during recessions?
“That’s a tough question,” Waisanen said. “What can a town do to solve what’s going on in the economy? I don’t know how to answer that one. If you have a diversified revenue base, that can be helpful when the economy has its ups and downs.”
Local officials say there is no magic alternate source of revenue to replace sales taxes.
“I suppose we’ll always be looking at how to get additional revenue but there’s not a lot of options,” Shroll said.
The law forbids towns from collecting income taxes. Also, a cap exists on the percentage towns can raise property taxes, which accounts for the second largest source of revenue in both towns, and town officials say they would hesitate to raise property taxes anyway.
“If everybody’s hurting, I don’t think the town is going to hurt people more by raising their taxes,” Shroll said.
While replacing sales taxes might not be feasible, there could be some ways to supplement them.
Throupe said towns could look into charging tourism fees on hotel rooms and rental cars. However, he said setting those fees too high could backfire by driving away tourists.
He also said the town could consider whether they are able to charge a fee to land at the Eagle County airport.
In Eagle, Powell said officials have been considering charging a land use fee for developers of residential and commercial subdivisions. Those fees would help to offset some of the labor costs the town incurs when senior employees spend hours reviewing subdivision plans.
Just because sales taxes are plunging during this historic recession, that doesn’t necessarily mean officials should discount them as an unreliable source of income.
Powell said he expects revenues to bounce back eventually.
“I do think by 2011 or 2012, Eagle will likely start growing again and sales tax will rebound,” he said.
Plus, new developments could add to the sales tax base. In Gypsum, the town has approved about 850,000 square feet of retail space that has not yet been built or has yet to attract tenants.
In Eagle, commercial development in Eagle Ranch, downtown Eagle, and along Chambers Avenue could boost sales taxes, Powell said. There is also the much-debated Eagle River Station, a proposed development including a Target.
Developers of the project say it will bring in $2.1 million to 2.5 million in sales tax revenue each year. However, opponents of that project have said they would prefer building a conference center, developing the downtown or allowing Whole Foods over approving a Target in town.
Whatever happens with future developments, it seems unlikely that towns will wean themselves off sales taxes any time soon.
“I think the sales tax has a long history of being an important revenue source for state and local government and I don’t see that changing,” Waisanen said.
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