As old-guard retailers shutter stores and lay off workers in the face of shifting consumer habits, Colorado municipalities are in a precarious position due to an unusual tax structure that depends …
As old-guard retailers shutter stores and lay off workers in the face of shifting consumer habits, Colorado municipalities are in a precarious position due to an unusual tax structure that depends mightily on retail sales taxes.
Bryan Archer, the director of finance for the City of Arvada, said the strong economy may be temporarily masking the problem, and another economic downturn could have severe consequences for governments.
“We are scared to death that as soon as everything slows down around here, our growth will be minuscule and we’ll lose tax base over time,” Archer said. “It could make it really difficult for cities to meet peoples’ needs.”
Even amid a gangbusters Colorado and U.S. economy, with stocks soaring and unemployment at a 17-year low in October, recent years have not been kind to brick-and-mortar retailers. Brands like J.C. Penney, Sears, Macy’s and Gander Mountain have closed dozens of locations — including many in the metro area and across the state. Englewood-based Sports Authority went defunct last year. Englewood’s Kmart closes this month, leaving the Arvada store as the last metro area location.
Nearly unique among states, Colorado towns and cities derive much of their operating revenues from locally imposed sales taxes, according to Phyllis Resnick, lead economist at the Colorado Futures Center, a Colorado State University-based think tank. The arrangement maintains local control and keeps property taxes low, but could portend fiscal disaster if current trends continue.
The scope of the trend depends on whom you ask: A report from international financial services company Credit Suisse found that 8,640 stores would be closed nationwide by the end of 2017, eclipsing the 6,200 that closed in 2008 at the peak of the Great Recession. An industry analyst report, RetailNext Store Performance Pulse, found year-over-year store traffic declined 5.5 percent in July, continuing a long-term slide. However, industry analyst group IHL released a report in August reporting that retailers will open a net of 4,000 new locations in 2017.
Black Friday — the deep-discount day at many retailers that follows Thanksgiving and kicks off the holiday shopping season — continues to vastly outpace Cyber Monday, its online alternative. Black Friday sales totaled more than $650 billion last year, compared to Cyber Monday’s $6.6 billion, according to the National Retail Federation.
Economists like Resnick and other Colorado experts, though, say that online shopping and shifting consumer habits may come to bear on municipal finances. As shoppers increasingly look to online retailers who can often skirt local sales taxes, the ripple effects of the so-called Retail Apocalypse may force governments — and citizens — to re-evaluate how they tax themselves.
“We’re seeing a seismic shift in the way people shop,” said Robert Golden, president and CEO of the South Metro Denver Chamber of Commerce, which represents more than 650 businesses across four counties. “The appeal of the mall and shopping has lost a lot of its zest for a lot of people.”
Golden attributed the shift in part to what he calls the “middle-class squeeze” — housing and education costs have soared, and wages have largely failed to keep pace, eating up discretionary spending and pushing middle-class earners toward online bargains.
The trouble is that many online retailers don’t collect sales tax on behalf of municipalities, Resnick said.
“We’ve said we have to solve this problem before it solves us,” Resnick said.
Some online retailers, such as Amazon, have agreed to impose sales tax on purchases, based on the shipping address of the recipient, Resnick said.
However, the agreement doesn’t apply to Amazon’s third-party vendors. The company says it hosts more than 100,000 vendors who do more than $100,000 each in sales annually, amounting to more than $10 billion a year.
Resnick said online retailers are hesitant to enter into taxing agreements in places like Colorado, where the patchwork of taxing authorities could land sellers in hot water with auditors.
“Another part is the tradition that we don’t tax the internet,” Resnick said. “People start to think it’s a tax increase. Technically the purchaser is liable to pay local sales tax, but the state has not enforced that. At the local level, each city would have to.”
Multiply the number of online retailers by the number of municipalities and the scope of the dilemma becomes clear, Resnick said.
Resnick and her team run models that examine the state’s financial sustainability in coming decades based on current trends, and present possible scenarios to address problems.
“We’ve looked at the possibility of taxing services,” Resnick said. “Services don’t migrate online. Fixing your house, cleaning your pool — those can’t dry up like brick and mortar stores can.”
Resnick said another contributing factor of the Retail Apocalypse is an aging society. As people have fewer children and the age of the general populace climbs, spending on material goods drops. Service taxes would make sense under such conditions, she said.
“The only other places to generate revenue would be income or property taxes,” Resnick said. “But we have a prohibition on local income tax in Colorado.”
And hiking property taxes is pretty unpopular, she said.
No easy fix
Tax reform is inevitable, said Archer, the Arvada official. Like many metro municipalities, more than half of Arvada’s revenue comes from sales taxes.
“(Tax reform efforts will) have to be organic and come from the citizens,” Archer said. “They’ll need to want better roads or parks.”
Amazon’s agreement to collect sales taxes for cities is helping, but it doesn’t fix the problem.
“I’d love to say it’s problem solved, but Amazon isn’t even 20 percent of the online market,” Archer said.
Arvada takes the relatively rare approach of taxing groceries, Archer said, which has softened the blow.
“We have five King Soopers and multiple Safeways,” Archer said. “People still buy groceries here even though they threaten not to.”
Government budgets in Colorado are already tightly constrained by the TABOR amendment, Archer said, with funding for education and other government services already anemic despite a robust economy. TABOR — the Taxpayer’s Bill of Rights — was enacted in 1992, and it sets a cap on government spending and requires a popular vote for tax increases.
The shift toward online retail could have further fallout as the impact comes to bear on the labor market, Resnick said.
Nationally, the retail sector has lost jobs every month in 2017, according to Bureau of Labor Statistics data.
The bright side
It’s not all bad news, said Golden, of the South Metro Chamber, which is based at the Streets at SouthGlenn shopping center in Centennial.
“You can’t find a parking spot on weekends,” Golden said of the shopping center. “Small retailers, those with something unique to sell, can do very well. They have less overhead, less expense and less inventory.”
Millennials increasingly seek out localized lifestyles, where they can obtain the necessities of life without having to travel far, Golden said.
“I believe there will always be a place for the small shop,” Golden said. “As long as people like walking down the street and popping into stores, they should survive.”