Pandemic shopping spree creates economic windfall for rural communities

Before the pandemic, many rural counties struggled to bring in enough taxes to fund services.

But a change in how we collect sales tax, followed by a pandemic, has turned things around for some of them, at least for now.

To understand what changed, you have to go back to 2008.

That’s when Washington state changed the way sales tax is collected. It would no longer be collected at the address of the store. Instead, it would be collected wherever the customer took possession of the goods.

James McCafferty is co-director of Western Washington University's Center for Economic and Business Research. He gives this example:

“Let’s think about Home Depot. If I go to Home Depot and buy a load of lumber and take it from the store, that transaction occurs at the store. But if I have them deliver that lumber, and they deliver it to my house, that transaction occurs in my driveway.”

Whenever you buy something, some of the sales tax goes to the state and some goes to the local community.

This change in where a sale is recorded meant that more sales tax would go to the communities where people live, rather than where the stores are.

Even before the pandemic, this change started bringing new wealth to small towns and rural counties.

“We had communities like Concrete which suddenly had huge increases in sales tax collection, where before they didn’t have very much because they didn’t have a retail presence,” McCafferty said.

During the pandemic, some of these rural places saw even bigger windfalls.

For example, Island County Budget Manager Doug Martin said his county saw a 23% increase in sales tax income last year.

“So instead of someone in Island County going to Costco in Burlington or in Smokey Point, they ordered it. And so, it got delivered,” WWU economist McCafferty explained.

Island County officials consider last year's income spike to be a fluke. When you look at all the ups and downs, the average over three years is much lower.

Like Island County, Walla Walla County saw a significant increase in sales tax income last year, up 24%. It’s using the money to hire more deputies and buy new equipment for the Sherriff’s Office, according to County Commissioner Todd Kimball.

“So the rural communities have seen this increase in general," McCafferty said. "And that will greatly assist them as they think of recovery from Covid and how they continue to grow those communities. So the question will remain: How much of that sticks? And how much of that goes back?”

McCafferty said consumers may change their behavior after the pandemic.

But the data suggests that online retail will continue to grow, with or without a pandemic.

And as long as that trend continues, so will the sales taxes generated for rural communities.

High consumer spending is a double-edged sword

Construction projects — private and public — also contributed to higher sales tax for rural governments. With inflation at 8.3% last month, people paid more to get these projects completed.

Cesar Osorio, the owner of Jay’s Flooring in Marysville, said he’s been doing a lot of remodels lately for people who are working from home.

“They want to feel the house is clean, it's nice looking — so they’re probably spending there most of the time — so at least when they’re there, they probably want to see something that they really love,” Osorio said.

Osorio has gotten around supply chain problems by locally warehousing large supplies of a limited number of products.

He said his his costs have been rising lately, as have his prices. But customers don’t seem to care. They pay anyway.

Hart Hodges teaches economics at Western Washington University. He's co-director of the Center for Economic and Business Research, along with James McCafferty.

Part of Hodges' job is to forecast what will happen with the economy in the Puget Sound region. He said stimulus money and reduced student loan payments have people feeling like they've got money to burn.

"People are saying, 'Woo-hoo, I’ve got this cash, I want something shiny, now,'” Hodges said.

But he warned that economic storms are on the horizon, and the good times will end, eventually. He said people would be wise to spend less and save more.

Hodges said, if his kid came to him and said they'd found $1,000, he wouldn't advise that kid to blow it all on a lavish party. But neither would he say, "Don't you dare spend any of that, I want you to put that away and spend it when you're old." Instead, he'd tell the kid to spend a little and save the rest.

That advice could be applied to individual consumers, whose bank accounts are larger than in the past, and to governments that have benefited from increases in local sales tax revenue.

Both have a windfall that they can spend now or save for a rainy day.