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Fast-Start Christmas Shopping Season Holds Promise For State Coffers

Higher, 6.35% Sales Tax, Passed This Year, Increases State's Take

Christopher Keating

December 05, 2011

With the Christmas shopping season off to a rousing start, state officials are hoping this will be the best season in years for sales taxes pouring into state coffers.

The gifts being purchased at a brisk pace at malls and retail outlets from Danbury to Stonington will not only bring smiles to the faces of young children, but also to the accountants who add up the dollars the state collects.

Across the country, analysts were surprised by the strength of the post-Thanksgiving sales as shoppers lined up outside big-name stores that opened late Thanksgiving night or before sunrise the next day. Nationwide, sales were up nearly 17 percent over the four-day Thanksgiving weekend, according to the National Retail Federation. The Black Friday sales were particularly strong.

In Connecticut, the tax collections could also increase this year in the first holiday season after the higher 6.35 percent sales tax rate became effective July 1. That hike was part of a package that was the largest tax increase in state history, passed by Gov. Dannel P. Malloy and the Democrat-controlled legislature.

The collection of sales taxes is important because the state's budget surplus is currently projected at $101 million, which represents one-half of 1 percent of the state's $20 billion annual budget. Analysts have warned that a downturn on Wall Street could easily throw the state into deficit because the current margin is so thin. So the holiday season is all the more important.

In Manchester, the Buckland Hills mall and adjacent stores have been jammed with shoppers. Sen. Steve Cassano, a former mayor of Manchester, said he has clearly noticed the additional shoppers since Thanksgiving.

"It's like turning on the lights. All of a sudden — bang!'' Cassano said of the huge increase in traffic in his hometown. "All signs are it's going to be a great holiday season.''

In an unexpected twist, the recent power outages could provide a boost for the season, he said. With tree-trimming companies and debris-removal services working overtime, some workers have received unanticipated income in recent weeks. In addition, many consumers should be getting refunds or credits soon from the pre-Halloween storm.

Construction work has already been brisk in the effort to repair damage this summer from Tropical Storm Irene, making construction the second-fastest-growing sector in employment recently, according to state labor statistics.

"Hopefully, people will get their utility checks before Christmas,'' Cassano said. "People have a few bucks in their pocket, and they're going to spend it.''

At the far end of the state, shopping has picked up at the Danbury Fair Mall, the largest mall in Connecticut. State Rep. Bob Godfrey, who represents Danbury, understands the pulse of the mall because he goes there at least once a month to get his hair cut.

"The parking lot of the mall has been filled recently,'' Godfrey said. "When you drive around there, you see New York plates, New Jersey plates. There's even Massachusetts plates. It's big.''

With a 6.35 percent state sales tax rate, lower than those in Westchester County and other neighboring New York communities, the Danbury mall attracts some distant shoppers who are so serious that they will travel there and spend the entire day shopping, Godfrey said. With J.C. Penney, Sears, Lord & Taylor, and Macy's, Danbury draws customers who pour over the New York line and drop their money into Connecticut coffers. And Godfrey says more of them have been coming recently as the region slowly recovers from the recession.

"Things are looking a little bit better,'' Godfrey said. "People are more relaxed. There's a lot of pent-up demand. The general feeling is the economy is inching better and not getting worse.''

Overall, the sales tax — on everything from Christmas gifts to automobiles — is projected to generate about $3.7 billion in a $20 billion annual state budget. That represents the second-biggest tax item in the budget behind the state income tax, projected to generate $8.5 billion during the current fiscal year. While the legislature's nonpartisan fiscal office pegs the projected surplus at $101 million, the governor's budget office and the state comptroller are less optimistic, with the surplus projected at less than $80 million.

One wild card of the season is the amount of online shopping and whether the state will collect sales tax on those purchases. The state's tax commissioner, Kevin B. Sullivan, recently said that he does not expect the state to receive a projected $9.4 million per year in taxes from Internet sales. The so-called Amazon tax was approved this year as part of the state budget, but Sullivan has said all along that it would be difficult to collect. Amazon is still fighting the issue in court in New York, which in 2008 became the first state in the nation to create such a tax. While some states are taxing online sales, the ongoing unresolved legal debate has thrown collection into uncertainty.

But not all online retailers skip paying Connecticut sales tax. If a cyber-retailer has a presence in the state — a physical store — it often will collect the tax. L.L. Bean, for example, had been considered a "remote seller'' that did not have to charge sales tax until it opened a store in South Windsor. Now, because it has a physical presence in the state, the company charges sales tax. In the same way, Cabela's had been an online retailer only until it opened a large store near Rentschler Field in East Hartford.

Connecticut citizens have an obligation under the state's use tax to pay the sales tax if they buy items out of state or from online companies with an out-of-state presence. The use tax is mentioned on the official state tax forms, but enforcement is virtually nonexistent.

Like their constituents, legislators acknowledge shopping online because of the convenience.

"I've been doing more online because my mother is a huge Arizona Cardinals fan,'' Godfrey said. "You can't go over to the Danbury Fair Mall and find a lot of Cardinals stuff. My sister is a Titans fan. She lived in Nashville for a while. I go to nflshop.com.''

But House Republican leader Lawrence Cafero of Norwalk said that looking at the sales tax and the revenue side is not enough. In order to keep the budget in balance, state officials must make sure that spending cuts that are contained in the budget are actually implemented during the fiscal year. In order to balance the budget, legislators require state agencies to save millions of dollars in so-called lapses — unspecified cuts determined by each agency.

"This is a seesaw,'' Cafero said. "You need the revenues, but you also must control your expenditures. Obviously, if you raise taxes, you'll get more money. It's not the revenue side I'm concerned about. … We're paying far more for far less. The state of the state, financially, is tenuous at best.''

Timothy Phelan, the president of the Connecticut Retail Merchants Association, also cautioned that retailers are hoping that the momentum continues all the way through the post-Christmas sales.

"From what we can gather, everybody got off to a good start, and we're happy with that,'' Phelan said. "But with every Christmas season, we can't make snap judgments based on the first weekend. There was a lot of promotional activity around Black Friday and Thanksgiving weekend. It's hard to predict with any great certainty what will happen.''

Last year, for example, Connecticut retailers were expecting 3 percent growth over the previous year, but the actual number turned out to be 5 percent in a better-than-expected year.

This year's general optimism is a far cry from the depths of the recession — in the months following the collapse of the Lehman Brothers investment bank and the cascading downward effect it caused on Wall Street. Major financial firms were bailed out as the stock market bottomed out.

In a speech to a business group shortly before Christmas 2008, Gov. M. Jodi Rell was particularly downcast — though realistic — about the situation at that point.

"People aren't buying. People are afraid,'' Rell said at the time. "They're saving their money, and they're not buying those big-ticket items, whether it's a car or the refrigerator or the washer or dryer or any of those things. People simply aren't buying unless they absolutely have to.''

Rell told the crowd that it was a sharp departure from only two years before — when the state had a budget surplus of more than $1 billion.

"Unfortunately, those days seem like the 'Ghost of Christmas Past' right now,'' Rell wrote that month in testimony on the economy to the U.S. House of Representatives.

But officials said that Christmas 2011 is a totally different time — not a boom period, but certainly better than the gloom-and-doom days of late 2008. And that should translate into more money for the state.