Retail sales numbers announced this week didn’t bring tidings of comfort and joy this holiday shopping season. According to TNS Retail Forward, 2008 holiday retail sales are down 2.5% this year compared to the same data a year ago. The number is particularly bleak when you remove discount retailer Wal-Mart, the only major retailer to post an increase over last year. Some of the biggest names in retail are showing dramatic declines.
Abercrombie & Fitch down 28%. Nordstrom’s down nearly 12%. Even, Costco dropped 5%. A bad holiday shopping season will have a delayed but pronounced impact on California’s sales tax revenue, which in turn has an impact on the state’s budget deficit. Sales taxes generate nearly a third of our state’s revenues.
Among all the bad economic news, most see a silver lining in substantially lower gas prices. But, that good news is bad news for state budget purposes. The BOE estimates that nearly twice as much sales tax is generated annually by higher gasoline prices than five years ago. Those higher prices generated approximately $3.6 billion in sales tax during 2007 when the average price was $3.12. In contrast, 2003’s gasoline sales generated $2.1 billon in sales tax when the average pump price was $1.88.
If you have filled up lately, you know we are right back to that $1.88 per gallon range. In six months, California’s average pump price has dropped from an all-time high of $4.58 to $1.95 per gallon. If gas prices remain low, the state could add another $1.5 billion to the state budget deficit.
Obviously, it’s a net positive for gas prices to remain lower, but there is no question that it complicates the state budget mess. The National Conference of State Legislatures pegs the current deficit at $28 billion over the next 18 months. Between weak holiday sales and lower gas prices, I predict the state’s budget deficit will reach the low-$30 billion range by late January.