As consumer spending remains sluggish, the impact on taxes generated from retail sales is also feeling pinched – and could have a negative impact on local municipalities.

New York state saw its sales-tax growth rate drop to 1.6 percent in the first six months of the year, which compares to a 3 percent growth rate in the same period last year, “and was considerably lower than the 4.2 percent average annual growth over the past 15 years,” said state comptroller Thomas P. DiNapoli in a report released late last week.

New York is not alone. According to data from researchers at the Nelson A. Rockefeller Institute for Government, a lag in sales-tax growth across the 45 states that have sales taxes is weakening overall tax revenue for these states.

Donald J. Boyd and Lucy Dadayan, authors of the report from the institute, said “the weak economic recovery has contributed to the weak growth in state tax revenues. Seven years after the start of the recession, inflation-adjusted state government tax revenue is only 5 percent above its prerecession level.”

The researchers said in the four preceding economic recoveries, “inflation-adjusted state tax revenue by this point had grown several times as much, ranging from 15 to 25 percent above prerecession revenue.”

“The sales tax has been the weakest of the major taxes, reflecting the slow growth in consumption,” the authors said. “The personal income tax, while stronger than the sales tax, has been held back by a huge decline in capital gains, which have recovered only partially.”

The declining growth not only reflects softness in consumer spending, but reveals how consumer expenditures can impact state and local government budgets, which rely on income, sales and corporate taxes to maintain services and infrastructure. According to the Bureau of Labor Statistics and the U.S. Department of Commerce, nearly two-thirds of the country’s gross domestic product is driven by spending on goods and services.

When spending slows, local municipalities can be negatively impacted — especially poorer communities where income taxes are not generated at the same rate as other areas. According to Governing.com, although it is rare for a municipality to file for bankruptcy (called a Chapter 9 filing), several have in recent years, including: the City of Detroit; City of San Bernardino, Calif.; Town of Mammoth Lakes, Calif., which was later dismissed; City of Stockton, Calif.; Jefferson County, Ala.; City of Harrisburg, Pa. (also dismissed), and City of Central Falls, R.I.; among others.

Retail sales taxes are typically shared between the state and a local municipality. In some cases, the state takes a portion, the county takes another portion and a chartered city may also take a part. So when spending slows, the impact is seen across all levels of government.

“There has been a general downward trend in sales tax collection growth over the last several years and that is continuing in 2015,” DiNapoli said. “The slow growth in sales taxes could pose fiscal challenges for local governments across New York, especially for counties who rely heavily on sales tax collections to pay their bills.”

The comptroller said county sales tax collections (excluding all incorporated cities) experienced a 0.5 percent increase in the first half of the year, “with many counties seeing a decline in their collections.” But New York City had a 2.7 percent gain in the period, “accounting for a substantial part of local sales tax growth statewide. Still, the city’s growth rate fell from a 4.8 percent growth rate for the same period in 2014.”

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