Analysis Mass. state sales tax revenue and the business cycle

from NewsLink, Vol. 7, No. 1 Fall 2002

Public policy experts often argue that sales tax revenue is unpredictable. "The principal problem is that the amount of money that the sales tax will yield from one year to the next is difficult to estimate inasmuch as it depends primarily on business cycles and inflation rates."(Hy and Waugh, 1995)1 Massachusetts sales tax data from the last 16 years seems to validate this statement. As Chart 1 shows, Massachusetts sales tax revenue is closely linked to Massachusetts business cycles, as measured by the state monthly unemployment rate. When unemployment goes up, real state sales tax revenue tends to go down. For example, during the 1990-1991 recession, when Bay State unemployment reached a high of 9.6 %, real sales tax revenue was dropping, reaching a low for the 16 year period in February of 1992. With state unemployment continuing to rise, doubling in the last two years from 2.6% in September 2000 to 5.2% in September 2002, declines in real state sales tax revenue can be expected. Sales tax revenue, over this period, accounts for roughly 20% of all state tax revenues. The downward trend in revenues will only exacerbate the current fiscal crisis facing the new administration. (Source: Massachusetts Deparment of Revenue, US Bureau of Labor Statistics.) (1) State and Local Tax Policies: A Comparative Handbook, Ronald John Hy and William L. Waugh, Jr. Lexington Books, 1978. NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2003. All rights reserved. HTML format revised on 7/3/03 12:12 PM