Sales-tax numbers confound officials

A lot of head-scratching was going on Tuesday as economic types reacted to the news that Mitchell's firstquarter sales-tax collections increased by 9.71 percent compared to 2008.

A lot of head-scratching was going on Tuesday as economic types reacted to the news that Mitchell's firstquarter sales-tax collections increased by 9.71 percent compared to 2008.

The collections were announced Monday evening by Finance Officer Marilyn Wilson during a City Council meeting. A question was raised about the timeliness of the data, and Wilson clarified Tuesday that the collections received during the first quarter actually reflect sales made by businesses in November, December and January. In other words, there's a two-month lag in the data.

Still, the lag time hardly diminishes the surprise at the positive trend. At least one economist has said the recession in South Dakota began in November, and Mitchell's unemployment rate went from 2.9 percent in November to 3.9 percent in December and 6.4 percent in January.

Yet Mitchell's sales tax revenue kept growing. The $2.063 million collected from the city's 2 percent sales tax was the highest first-quarter collection in the city's history.

"I don't know if I can fully explain it," City Council President Jeff Smith said Tuesday. "The most important thing is to continue to watch and monitor it very closely, and we're doing that."


Sales taxes are a key revenue source for the city. This year's nearly $33 million city budget includes a projected $9.26 million in revenue from the 2 percent sales tax. Another $621,000 of revenue is projected from the additional 1 percent "entertainment tax" on lodgings, alcoholic beverages and prepared food. Collections of that tax also were up during the first quarter, by 3.12 percent as compared to last year.

Like Smith, several other people who watch sales-tax returns closely are surprised by the growth in Mitchell's numbers. Many shared guesses Tuesday as to why the city's collections have continued to grow, but none claimed to have the definitive answer.

Smith thinks that a substantial number of laid-off workers in Mitchell are finding other work quickly, and he thinks the recession could be causing people to shop closer to home rather than travel to places like Sioux Falls. If that's the case, Sioux Falls doesn't seem to be suffering greatly from it. Its sales-tax revenue was 1.9 percent higher in February than it was the previous February.

David Owen, president of the South Dakota Chamber of Commerce and Industry, said he is just as surprised by Mitchell's numbers as local officials are. He said, however, that anecdotal communications from his members have not been as dire as some might expect during a recession.

"Perhaps there's more strength in the economy than we're afraid there is," Owen said.

The broad application of South Dakota's sales tax -- the state has the second broadest tax after Texas, Owen believes -- could also be helping. Even if consumer spending slows, businesses in South Dakota still must pay sales taxes on a broad array of supplies, services and other expenditures.

"We could be seeing some of the strengths of the broad nature of our sales tax," Owen said. "It brings some antirecessionary diversity to it that other states don't have."

Owen said unemployment insurance may also be helping people to maintain spending levels while they're laid off. Bryan Hisel, executive director of the Mitchell Area Chamber of Commerce and Mitchell Area Development Corporation, also mentioned unemployment insurance and echoed what Owen has been hearing from businesses around the state.


"I haven't had a lot of reports to me from small or large businesses in sales and services that would indicate to me that things are terribly wrong," Hisel said.

It's possible, several officials acknowledged Tuesday, that Mitchell's sales tax collections will still be impacted negatively by the recession. The state Department of Revenue and Regulation issues reports that lag sales by only one month, as compared to the two-month lag at the city level. The state's report on Mitchell for February, which combines the 2 percent sales tax and the additional 1 percent entertainment tax, shows a decline of 1.87 percent as compared to last year.

Jane Page, of the state revenue department, said there are numerous factors -- unseen to most people -- that could be influencing Mitchell's collections in unpredictable ways.

Businesses file their tax returns with the state, and the state sends cities their share. If a business files a return and then fails to remit any money -- perhaps because the business closed -- the state still pays the city its share of what was reported on the return.

"With the recession, we don't know if that's happening more," Page said. "It happens all the time, but whether it's happening a lot more right now, we just don't know."

State audits also can skew collections data. If the state finds a business that owes a large amount of back-taxes, for example, that large back-payment can make a city's collections look artificially higher. The finance officer at Yankton said Tuesday that a large audit payment made that city's collections for the first two months of 2009 appear 4 percent higher than the first two months of 2008. Without the payment from the audit, the finance officer said, the city's collections would have been about the same as the previous year.

Wilson said Tuesday that she could not recall any major audit payments to Mitchell during the first quarter of this year. With no such identifiable factor to take credit for the seemingly counter-intuitive increase in the city's collections, Hisel said Mitchell should just accept the good news and move on.

"Time will tell," he said. "Let's check in on the next quarter and see what happens. The data will tell us where we've been."

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