Springsted Incorporated

4698 Honeygrove Road, Suite 4

Virginia Beach, VA  23455

Tel:  757.422.1711

Fax:  757.422.6617

www.springsted.com

 

 

 

 

 


August 3, 2006

 

 

 

Mr. Dave Corliss, Interim City Manager

City of Lawrence

City Hall, 6 E. 6th Street

Lawrence, KS 66044

 

Dear Mr. Corliss:

 

SUBJECT:  ANALYSIS OF 2006 SALES AND USE TAX PROJECTED REVENUES

 

You have requested that Springsted advise you on 2006 sales tax receipts from both the City Sales Tax and the City’s share of the County-wide Sales Tax.  We have reviewed historical information provided by the City’s Finance Director, Mr. Ed Mullins, as well as relevant information maintained by the Kansas Department of Revenue concerning monthly sales tax distributions since 1995 through July 2006.  We performed regression analysis and other analytical techniques to develop a conservative estimate of 2006 annual sales tax receipts. 

 

The table below shows the various sales tax revenue amounts used by the City of Lawrence to formulate the 2007 Recommended Budget.  It also shows our projection of sales tax revenues for 2006.

 

Table One

 

2006
Budget

2006 Projection in
07 Rec. Budget

2006 Projection
revised 7/31

Springsted
2006 Projection

City Sales Tax

12,000,000

12,358,441

12,490,000

12,220,223

City Use Tax

    800,000

     917,883

     920,000

     897,450

County Sales Tax

 7,480,000

  8,217,189

  8,150,000

 8,065,595

County Use Tax

    600,000

     677,318

    640,000

    652,911

TOTAL

20,880,000

22,170,832

22,200,000

21,836,179

 

The 2006 projection used in the 2007 Recommended Budget is different than the revenues in the 2006 Budget because sales tax was underestimated as a means to achieve the maximum  5% budgeted fund balance allowed by statute.  Our analysis examines PROJECTIONS rather than BUDGETED figures.  

 

Table One below summarizes annual sales tax receipts for the period 1996 through 2005, including the annual growth rate during this period.  No annual growth rate was computed for the County Sales Tax in 1996 because the tax was enacted in 1995 and, therefore, collections in that year were not for a complete 12 month period.  Any comparison between 1996 and 1995 would be exaggerated and misleading.

 

Table Two

City of Lawrence Sales Tax Receipts

& Growth Rates

               

 

Receipts

 

Percentage Change

Year

County Sales Tax

City Sales Tax

County

City

1996

$5,320,044

$8,367,356

n/a

-0.7%

1997

$5,745,283

$8,909,583

8.0%

6.5%

1998

$6,197,485

$9,674,389

7.9%

8.6%

1999

$6,321,402

$10,174,313

2.0%

5.2%

2000

$6,967,930

$10,348,072

10.2%

1.7%

2001

$7,076,972

$10,739,915

1.6%

3.8%

2002

$6,998,303

$10,789,837

-1.1%

0.5%

2003

$7,145,700

$10,914,097

2.1%

1.2%

2004

$7,605,913

$11,438,872

6.4%

4.8%

2005

$7,869,536

$11,841,826

3.5%

3.5%

 

The average annual growth rates for this period are 4.6 percent for the City Sales Tax and 5.3 percent for the County-wide Sales Tax.  The range of growth rates from low to high are as follows:

 

City Sales Tax                      -.7 percent in 1996 to 8.6 percent in 1998

County Sales Tax                -               1.1 percent in 2002 to 10.6 percent in 2000

 

Table Three characterizes the City’s share of the County-wide Sales Tax.   It indicates that the City receives approximately 60 percent of the County-wide Sales Tax.  This has been consistently the case since 2000.  Table Four summarizes estimated taxable sales in the County and City for the period 2000 through 2005. The City of Lawrence accounts for approximately 90 percent of all taxable sales in Douglas County.  In 2005, taxable retail sales totaled approximately $1.314 billion in the County, of which $1.184 billion were attributable to the City. In 2005, the County received approximately $13.1 million of which the City received $7.8 million.

 

 

Table Three

 

City/County Sales Tax Yield For 2000 to 2005

Year

City

County

City Share

% of Total

2005

$11,841,816

$13,145,214

$7,869,534

59.9%

2004

$11,438,872

$12,675,467

$7,605,914

60.0%

2003

$10,914,096

$11,968,877

$7,145,702

59.7%

2002

$10,789,838

$11,772,143

$6,998,302

59.4%

2001

$10,739,913

$11,697,207

$7,076,971

60.5%

2000

$10,348,072

$11,474,721

$6,967,930

60.7%

 

Table Four

 

City/County Taxable Sales

Year

City

County

City %

of Total

2005

$1,184,181,600

$1,314,521,400

90.1%

2004

$1,143,887,200

$1,267,546,700

90.2%

2003

$1,091,409,600

$1,196,887,700

91.2%

2002

$1,078,983,800

$1,177,214,300

91.7%

2001

$1,073,991,300

$1,169,720,700

91.8%

2000

$1,034,807,200

$1,147,472,100

90.2%

 

Tables Five and Six compare January through July sales tax receipts as a percentage of total annual sales tax receipts as well as growth rates for the seven month period versus total year.  The seven month period has been fairly stable in providing about 57 percent of annual receipts.  Also, there is some variance in terms of the growth rate for the first seven months of the year versus the annual growth rate.  For the period 1997 – 2005, four times the County-wide Sales Tax growth rate for the first seven months was lower than the year and five times it was higher than the annual rate.  The range of variance for both sales taxes was .1 percent to 3.8 percent. For the period 1996 to 2005, the City Sales Tax growth rate for the first seven months was lower than the annual rate four times, and higher six times.

 

 

 

 

 

 

 

Table Five

 

 

January - July Receipts as a

Percentage of Total Annual Receipts

Year

County

City

County

City

1996

$3,049,262

$4,816,657

57.3%

57.6%

1997

$3,306,427

$5,196,596

57.6%

58.3%

1998

$3,675,659

$5,637,569

59.3%

58.3%

1999

$3,609,816

$5,718,602

57.1%

56.2%

2000

$3,964,862

$5,710,359

56.9%

55.2%

2001

$4,039,033

$6,142,363

57.1%

57.2%

2002

$4,008,710

$6,167,756

57.3%

57.2%

2003

$4,068,835

$6,204,576

56.9%

56.8%

2004

$4,332,812

$6,555,223

57.0%

57.3%

2005

$4,470,727

$6,733,574

56.8%

56.9%

2006

$4,628,597

$7,101,623

57.9%

59.5%

 

Table Six

 

Douglas County

City of Lawrence

 

Comparison of Growth Rates

Variance Jan-Jul

Comparison of Growth Rates

Variance Jan-Jul

Year

Jan-July

Annual

Vs Annual

Jan-July

Annual

Vs Annual

1996

n/a

n/a

n/a

2.4%

-0.7%

3.1%

1997

8.4%

8.0%

0.4%

7.9%

6.5%

1.4%

1998

11.2%

7.9%

3.3%

8.5%

8.6%

-0.1%

1999

-1.8%

2.0%

-3.8%

1.4%

5.2%

-3.8%

2000

 9.8%

10.2%

-0.4%

-0.1%

1.7%

-1.8%

2001

1.9%

1.6%

0.3%

7.6%

3.8%

3.8%

2002

-0.8%

-1.1%

0.3%

0.4%

0.5%

-0.1%

2003

1.5%

2.1%

-0.6%

0.6%

1.2%

-0.6%

2004

6.5%

6.4%

0.1%

5.7%

4.8%

0.9%

2005

3.2%

3.5%

-0.3%

2.7%

3.5%

-0.8%

2006

3.5%

TBD

 

5.5%

TBD

 

 

The regression analysis indicated that the standard error was $186,000 for the City Sales Tax and $221,000 for the County-wide Sales Tax.  The standard error estimates the standard deviation of the sample mean based on the population mean.  Bottom-line, the standard error helps articulate what your margin of error could be if you rely on projecting based on the average growth rate. 

 

Based on all the above information, Springsted recommends the City consider the following estimates of sales tax receipts for 2006:  City sales tax receipts of $12,200,223 and County sales tax receipts of $8,065,595.

 

These amounts were based on the historical average annual growth rate less the standard error mentioned above.  This methodology results in 2006 growth rates of 3 percent for the City Sales Tax and 2.5 percent for the County-wide Sales Tax.  It is possible that actual receipts will be higher than Springsted’s estimate. 

 

Kansas (and all states that have a general sales tax) imposes a use tax on goods purchased by Kansans from outside the state and used, stored, or consumed in the state and on which no sales tax was paid or a sales tax less than the Kansas rate was paid.  The tax applies only to tangible personal property.  The compensating use tax is the tax most often unpaid by Kansas individuals and businesses.  The two types of compensating use tax are consumers’ and retailers’.  The Consumers’ tax is paid by Kansas consumers directly to the Kansas Department of Revenue.  The Retailers’ tax is collected by retailers in other states from Kansas customers.

 

Prior to July 1, 2003, the tax was equal to the Kansas state sales tax rate plus the local use tax on vehicles and boats only.  After July 1, 2003, the local use tax applies to all tangible personal property shipped from outside the state to a Kansas resident for use, storage, or consumption. 

 

Table Seven

 

City of Lawrence

City Use Tax Distributions

Year

Amount

Growth

Rate

2001

$220,286

n/a

2002

$234,608

6.5%

2003

$435,021

n/a

2004

$858,804

n/a

2005

$882,731

2.8%

2006  SI  Projected

$897,450

1.7%

Table Eight

 

City of Lawrence

County Use Tax Distributions

Year

Amount

Growth

Rate

2001

$167,287

n/a

2002

$182,458

9.1%

2003

$315,054

n/a

2004

$638,764

n/a

2005

$640,737

0.3%

2006 SI Projected

$652,911

1.9%

 

The legislature changed the basis for the compensating use tax effective July 1, 2003.  Therefore, the growth rate comparisons between 2003 versus 2002 and 2004 versus 2003 are not meaningful because the first full year of receipts using the new basis was 2004.  Because of the few growth rate observations and the potential unpredictable nature of the compensating use tax, Springsted is recommending a method for calculating the projected 2006 receipts based on the 2006 January to July growth rate over the same period in 2005.  This results in very modest increases in both of these revenue sources.  We expect revenues to grow at less than 2 percent in 2006 compared to 2005.  The amounts projected for the City and County 2006 distributions are $897,450 and $652,911, respectively. 

 

Our total projection for 2006 is as follows:  City sales tax $12,200,223, County sales tax $8,065,595, City use tax distribution of $897,450, County use tax distribution of $652,911 for a total of $21,836,179.

 

Conclusion

 

For the recommended 2007 City budget, City staff initially projected total sales and use tax in 2006 to be $22,170,832.  Our analysis indicates that the likely 2006 total will be $21,836,179, a difference of -$334,653.  We also believe that the projected growth for 2007 will be similar that of 2006. 

 

It is a pleasure to assist the City of Lawrence in this matter.  Thank you for choosing Springsted as your independent financial advisor.  Please do not hesitate to call me if I can be of further assistance.

 

Respectfully submitted,

 

 

 

 

John Moir, Senior Vice President

 

bdb

 

cc:          Debbie Van Saun, Assistant City Manager

                Ed Mullins, Finance Director