Sharp declines in the construction industry and sagging retail sales hint at a tough winter for Arizona’s tax collection at a time when the state is staring at an $800 million budget deficit that many expect could reach $1 billion by June.
In October, Arizona employers in the construction industry cut 4,100 jobs. Since October 2006, the construction trade has pared nearly 19,000 jobs, an 18.8 percent decrease. The job losses, says Don Wehbey, a senior economist for the Department of Economic Security, are due to a sharp decrease in the number of new homes being built across the state.
And the decline in home construction will have a direct impact on the state’s tax collection. The hardest hit, Wehbey said, will be sales taxes.
“When you think about [the high sales tax collections] we’ve had in recent years, it’s been because of new housing,” he said. “When people move into a new house, they buy pretty much everything.”
Less spending by homeowners translates into not only less sales tax revenue for the state, but also fewer overall sales for retail stores. And fewer sales, Wehbey says, cause store owners to be more reluctant to hire additional employees.
Retail sales during the back-to-school period – generally considered August and September – were weaker than normal, Wehbey said, and the sluggish sales are continuing into the typically busy holiday shopping season.
“The retail sales appear to be about one-third of what they should be,” he said. “This isn’t surprising for a slowing economy, I was just hoping it would be better than that.”
Although Arizona’s 3.5-percent unemployment rate is considerably below the 4.7-percent national average, Wehbey says employees are still concerned about job security. That concern, he says, translates into cutting down on the discretionary spending that had fueled economic surges in recent years.
Higher fuel costs are also driving down consumer spending, Wehbey said.
The current budget, which was approved by lawmakers and the governor in June, was based on estimates that the state will collect about $10.1 billion in taxes. Of that, nearly half, or $4.9 billion, is expected to come from sales taxes. Individual income taxes were predicted to account for slightly less than $4 billion.
However, sales and income taxes are already sharply down for the fiscal-year-to-date, and the state has collected about $148 million less than expected through September, the last month for which data are available. The deficit is exacerbated by a $226 million shortfall in the previous fiscal year, which ended June 30.
Economists in September predicted the current fiscal year would come in about $600 million below projections. But many lawmakers say they expect that number to climb as high as $1 billion, given the poor retail sales projections for the holidays.
Senate President Tim Bee said Nov. 16 the legislative budgeting agency told Republican leaders the state’s economy is flat, the first time in recent memory it has not shown growth.
“That’s an indication that we’re not going in a flat direction,” he said, adding it is likely the state’s economy would begin to contract in the coming months.
Despite the difficulties in the construction and retail industries, Arizona still set a record for non-farm jobs in October, adding about 5,000 total jobs over September.
And Wehbey says that Arizona’s historically high growth will spur the economy to pick up by the second half of 2008.
“We just need to manage the slowdown,” he said. “That’s the challenge — anybody can make money on the upside.”