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What happens if sales taxes tank as stores close?

The California-based Bebe women’s fashion chain is closing all its stores.
The California-based Bebe women’s fashion chain is closing all its stores. Dreamstime

Sacramento City Hall relies on sales taxes a lot – to put cops on the street, to keep up parks, to build roads.

But what if sales tax revenues go in the tank as more retailers go belly up?

The announcements about brick-and-mortar stores closing came in a flurry in recent weeks: Payless ShoeSource, then Rue21, then Bebe and, on Wednesday, Michael Kors. In all, 14 chains – including familiar names such as American Apparel and Radio Shack – have declared bankruptcy through early April, more than all of last year.

City Finance Director Leyne Milstein says she’s concerned and has asked a consultant to try to account for this trend in revenue forecasts.

To see why, you just have to look at the proposed budget the City Council is set to approve later in June. The sales tax is the second-biggest generator for the city’s general fund, which funds basic services. At about 17 percent of the total, it’s behind only property taxes, at 32 percent.

Besides a projected $78 million in sales taxes flowing into the general fund for 2017-18, another $46 million from the sales tax will go to the Measure U fund, which restored fire, police and parks services slashed during the Great Recession.

In 2016, sales tax receipts in Sacramento hit the highest levels in seven years across several sectors, including clothing stores, food markets and restaurants. But with fewer retail stores, it won’t be easy to match the sales tax numbers. Besides rising pensions costs and labor contracts, this is another reason to worry about balancing the city’s budget without cutting services.

The state will also be hit. It gets 5.25 cents of the 8.25-cent sales tax in Sacramento, while the general fund gets only 1 cent. A half-cent goes to county mental health and social services, a half-cent to public safety through Proposition 172, and a half-cent to countywide transportation projects through Measure A. The remaining half-cent is Measure U, which was approved by voters in 2012 and expires in March 2019, though the city is expected to ask voters next year to renew it.

The shuttering of stores is a national trend caused by too many malls, more online shopping and more spending on services, which aren’t taxed in California. The city does get a share of internet sales taxes, but it’s a fraction of revenue from stores.

While sales taxes make up about 12 percent of local government budgets nationally, the impact is much greater in already struggling places. Store closings are another body blow to Rust Belt cities, where factories closed, home values plummeted and young people fled.

So no matter how much financial pain Sacramento feels, it could be worse.

By the numbers

Projected revenue sources for Sacramento’s general fund, in millions:

Source

2017-18

2018-19

2019-20

2020-21

2021-22

Property tax

$149.6

$153.6

$158.0

$162.5

$167.1

Sales tax

$78.5

$81.3

$84.0

$87.0

$89.8

Utility user

$61.3

$61.6

$61.9

$62.2

$62.5

Other

$174.3

$174.1

$176.0

$177.0

$178.1

Source: City of Sacramento

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