Texas is wrestling with a sales tax revenue problem

Texas is one of the places you’d expect to be booming in the current economy and you wouldn’t be far off the mark to think so. Their unemployment rate is down to 4.6%, ahead of the national curve. And that’s happening at the same time as their population is surging. (Up past 27.5M and rising at one of the faster rates in the nation.) Under these conditions you’d think that the government would be riding fairly high on the hog, revenue-wise.

But it hasn’t been as smooth of a ride as you’d imagine. Texas got their budget passed this summer, running to the tune of $217B, but the Governor wound up slicing more than $120M out of it. What’s the underlying cause? One factor is obviously the sustained drop in oil prices, a major source of revenue in the state. But the other is the fact that they’ve not been doing as well on state sales taxes as they might. As the Houston Chronicle reports, online retail sales are taking a bigger than expected bite. They first discuss the patchwork of laws around the country which govern the collection of online sales tax and then get down to brass tacks.

So, is that what’s happening in Texas, where sales taxes make up more than half the state’s revenues? Under state law, buyers are supposed to pay a “use tax” on items purchased from out of state, but compliance is largely voluntary and infrequent. Amazon has been collecting sales taxes in Texas since 2012, and since then has remitted more than $270 million to the state.

Amazon, however, doesn’t collect taxes from the 40 percent of third party sales that take place on the Amazon platform. Indeed, according to the Comptroller, only about 1 percent of the state’s sales tax revenues come from online sales. Since the Census reports that 8.7 percent of retail sales come from e-commerce, that suggests substantial avoidance by online retailers.

Texas doesn’t have a state income tax. (And can you imagine the howls coming from the Lone Star State if they proposed one?) But in the midst of an employment and population boom their sales tax revenue is actually going down. And that sales tax accounts for more than half of the money going into the state coffers.

I understand that many conservatives aren’t fond of the idea of a national system such as the proposed Marketplace Fairness Act, and I have more than a few questions about it myself. But at the same time, this looks to be a problem that isn’t just going away on its own. There’s only so much that can be done to help out brick and mortar stores in the face of all the advantages of online shopping, but in the majority of states a sales tax is simply part of the price you pay for keeping the doors open. (And that’s particularly true in the ones without a state income tax.)

People don’t “voluntarily” send in tax payments for online purchases they make where the seller doesn’t withhold the tax. And thinking that can somehow be changed is a fantasy. States like Texas will have to come up with a new approach to this or face the reality of a system similar to the Marketplace Fairness scheme. It’s either that or cook up an entirely new way to generate revenue.