State and local government budget planners have been on a roller-coaster over the last year.  They had no idea that government would shut down in March of 2020.  Sales taxes from online purchases have proved to offset some (but not all) of the losses from shuttered stores, entertainment facilities, restaurants and bars.  For those who are able to work from home, food delivery, home delivery of household merchandise have quickly become the new normal. Outfitting the home office with electronic equipment and furniture also pushed up sales taxes.  On a bigger scale, those who bought new homes in suburban and exurban communities during the pandemic are also boosting sales taxes on more durable goods.  The unexpected increase in online sales has spilled over to affect transport as well as accelerate changes in retail real estate.  Some places and companies are booming while others suffer fiscal distress or go out of business.  Not an easy time for budget planners.

Sales Tax and Wayfair

The boon in sales tax from e-commerce is not surprising but wasn’t easily planned for.  Following the Wayfair vs. South Dakota Supreme court decision, we wrote about the early roll-outs of state sales taxes on e-commerce here.  Each state is responsible for how they levy their e-commerce taxes so it’s tough to generalize.  But we have seen revenues generally coming in higher than expected given the surge in online buying.  Colorado Springs, for example, reported online sales and booming housing construction delivered the highest monthly increase in sales tax revenue in November in nearly two years.  At the beginning of the pandemic, the city’s sales taxes were down considerably and there is an expectation that Q1 2021 may look equally bleak as a second wave persists. 

Florida and Missouri are the only two states that have not implemented internet sales taxes.  As we noted in our previous report, Florida’s sales taxes made up 81% of total “own-source” general revenues in 2019 based on census figures.  Given the heavy historical dependence on sales transactions made on site within the state, significantly from tourism, we are not surprised to see major declines.  When we first looked at the Florida Office of Economic and Demographic Research for April, sales taxes were down $695 million or 31.7% below budget estimates.  The December 2020 report shows that sales taxes over the year were more than $2.3 billion below original estimates.   To be clear, these figures are variances, and not absolute collection numbers.  (Other revenues, such as corporate income tax and documentary stamp taxes came in higher than forecast, modestly softening the blow from sales tax losses.  The state has also revised its revenue estimates in August and again in December.)

Missouri has other problems, notably fiscal stress among tax increment districts dependent on sales tax from physical retail and various entertainment/leisure activities.  Tax increment districts set a baseline for tax growth within specific geographic boundaries and are a common form of finance in some states.  Bonds are supported by incremental taxes from new development within the district above the baseline.  On a romp through the MSRB’s EMMA list of COVID-19 disclosures, we noticed five such districts that had made “unscheduled draws on debt service reserve reflecting financial difficulties”.  Each are supported with sales taxes collected within the respective district.  At this point there have not yet been defaults but these districts bear watching.

It’s all connected: real estate

The pandemic has accelerated the transformation of retail sales from physical to online, which is likely to continue to re-shape commercial real estate.  Smaller communities with a dominant mall or retail component could be suffering fiscal stress.  Here’s one small anecdote from our local Broadsheet (lower Manhattan) that describes retail troubles.  We suspect this is not an unusual story.  According to the Broadsheet, the Center for an Urban Future found that 63 national retailers shut their doors in lower Manhattan in the last 12 months.  Across New York City, more than 1000 chain stores have closed their doors.  A Gap store in lower Manhattan stopped paying rent to its landlord after closing in March.  The landlord subsequently defaulted on its $70 million mortgage it used to buy the commercial condominium that houses the Gap. 

Brookfield, a Toronto-based $500 billion asset management company, operates retail properties in Brookfield Place in lower Manhattan.  Westfield Corporation, an Australian-based shopping center manager operates retail in the adjacent World Trade Center.  The Broadsheet reported that the two companies are willing to surrender multiple malls they own around the country rather than continue to make mortgage payments. 

Neither has defaulted at this point nor surrendered their properties.  However, Brookfield leases from the Battery Park City Authority, a state agency and Westfield leases from the Port Authority of New York and New Jersey.  A surrender or default on those properties would punch a hole in the revenue streams of these two public sector entities. 

On the other hand, demand for warehouse space has grown dramatically. Amazon and logistics companies are scooping up space in distressed retail malls. Located near residential communities, these spaces offer efficiencies for “last mile” delivery to customers. Luke Petherbridge, CEO of Link-Logistics told the audience at Bloomberg’s “The Year Ahead” conference last week, his company has amassed more than 400 million square feet of industrial and warehouse space particularly the “network of supply chain warehouses for retailers.”

It’s all connected: Port volumes surge

The pandemic dramatically increased demand for personal protective equipment (PPE) much of which comes from China.  As China began to open up, both west coast and east coast ports reported strong volume in November, 2020.  The following is taken from Transport Topics (January 4, 2021):

 West Coast

  • Port of Los Angeles reported a 22% increase year over year (YOY)
  • Port of Long Beach saw a 30.6% uptick in volume YOY
  • Port of Oakland’s volume was up 2.2%
  • The Northwest Seaport Alliance which operates Seattle and Tacoma reported an 11.3% increase YOY.

East Coast

  • Port of Virginia has a 23.3% increase in volume YOY
  • Georgia Ports Authority, which operates the Port of Savannah experienced a 28% YOY increase.  Savannah is expecting some additional increases in 2021.
  • The South Carolina Ports Authority, which operates five terminals in the state, including the Port of Charleston had a 12% YOY increase
  • Transport Topics notes that New York and New Jersey Port Authority have not yet reported November results.

Gulf Coast

  • The Port of Houston saw 7% higher volume.

Imports have been so heavy that there has been some difficulty handling the volumes.  Barron’s noted that increased volumes coupled with bottlenecks at ports around the world have increased shipping costs.  The industry is concerned that shippers may be ignoring US exports.  The Federal Maritime Commission wrote to the World Shipping Council to assert their concerns.

Here too, planners have had to swing from the impact of tariffs and trade wars to plenty and then to pandemic. The surge in port volume was a pronounced change from a slump at the end of 2019 due to the US/China trade war.   An earlier article in Transport Topics described the impact of the trade war on US ports.  Los Angeles for example, which is the nation’s busiest port saw a 12.4% drop in volume in November 2019.  They quote the Executive director of the Port of Los Angeles on the negative impact on consumers, manufacturers and supply chain employment from the trade war.  Going forward it is unclear whether the President’s executive order to “Buy America” will again limit imports from China and elsewhere. 

*Please note that we updated the link to the Florida Monthly Revenue report to more clearly reflect month-to-month variances in sales tax collections from budget estimates from April-December 2020 (February 5, 2021).