Bank of America provides monthly updates on state tax revenue trends. In the Bank’s latest publication it noted that median sales tax collections in July are pointing to a 0.4% decline, which would be the second consecutive drop after June’s -0.3% year-over-year posting. BofA’s strategists highlight that if July does end up down, it would mark the first time that we’ve seen two consecutive months of declines since April and May of 2020.
Appleton’s interpretation
The near-term trend is notable in that it reflects a slowing economy, but it is not a reason to ring alarm bells in our opinion. The declines are modest (less than 1%), follow only modestly positive results (1.4% avg prior 10 months), and a deceleration in sales tax revenues should be expected for the following two reasons: 1) sales taxes directly benefited from pent up demand and spending coming out of the pandemic and that level of spending was not sustainable and 2) more so than other tax revenue sources, sales taxes benefit directly from higher inflation (hmigher prices = higher sales tax collections, as long as spending remains healthy). So with inflation coming down, sales taxes should coe down as well (assuming spending is relatively stable).
State Credit Implications
While some states are naturally more leveraged to sales taxes than others – notably non-income tax states such as Florida and Texas – we don’t view the modest drop in national sales tax data as concerning for those “sales tax” states. Specifically for Texas and Florida, they both continue to benefit from unique demographic trends and their sales tax collections are likely to outperform national trends. Given only modest declines in national sales tax collection data, we do not believe there are noteworthy credit implications for individual states at this time.
Total State Revenue Trends Remain Stable
Supported by growth in personal and corporate income taxes, overall State revenue trends are stable-to-slightly positive. While we do not expect revenues to continue to climb, the trend in State Tax revenues remains healthy, and a good proxy for the stability in overall muni credit conditions.
This commentary reflects the opinions of Appleton Partners based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information. Specific securities identified and described may or may not be held in portfolios managed by the Adviser and do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed are, were or will be profitable. Any securities identified were selected for illustrative purposes only, as a vehicle for demonstrating investment analysis and decision making. Investment process, strategies, philosophies, allocations, performance composition, target characteristics and other parameters are current as of the date indicated and are subject to change without prior notice. Registration with the SEC should not be construed as an endorsement or an indicator of investment skill acumen or experience.
"At Appleton, we view curve steepness as an opportunity to potentially rotate out of shorter-dated bonds and reinvest the proceeds further out on the curve, but still within our target maturity ranges. This can generate greater income for clients. The return of relative steepness to the intermediate portion of the municipal curve is a welcome development, as it affords investors willing to accept a moderate amount of interest rate exposure with an opportunity to pick up substantially greater tax-advantaged income."
"Uncertainty is the norm in the capital markets, yet municipal bond investors have recently been forced to grapple with unusually high levels. Record YTD net issuance, rate volatility, monetary policy questions, and Fed leadership speculation have all led to increasingly unsettled markets. But with this uncertainty comes opportunity, and for those seeking tax-advantaged income, high-quality municipal bonds currently offer attractive yields at compelling valuations along with sound credit fundamentals..."
"After months of negotiations, President Trump signed into law the “One Big Beautiful Bill Act (“OBBBA”)” on July 4th. While there are wide-ranging implications for the economy, individuals, and corporations, it is our opinion that the impact of the OBBBA provisions on the municipal market will be relatively modest..."
Economic & Market Commentary
08.29.2024
Implications of Sales Tax Revenues on Municipalities
Monthly State Tax Revenue Results
Bank of America provides monthly updates on state tax revenue trends. In the Bank’s latest publication it noted that median sales tax collections in July are pointing to a 0.4% decline, which would be the second consecutive drop after June’s -0.3% year-over-year posting. BofA’s strategists highlight that if July does end up down, it would mark the first time that we’ve seen two consecutive months of declines since April and May of 2020.
Appleton’s interpretation
The near-term trend is notable in that it reflects a slowing economy, but it is not a reason to ring alarm bells in our opinion. The declines are modest (less than 1%), follow only modestly positive results (1.4% avg prior 10 months), and a deceleration in sales tax revenues should be expected for the following two reasons: 1) sales taxes directly benefited from pent up demand and spending coming out of the pandemic and that level of spending was not sustainable and 2) more so than other tax revenue sources, sales taxes benefit directly from higher inflation (hmigher prices = higher sales tax collections, as long as spending remains healthy). So with inflation coming down, sales taxes should coe down as well (assuming spending is relatively stable).
State Credit Implications
While some states are naturally more leveraged to sales taxes than others – notably non-income tax states such as Florida and Texas – we don’t view the modest drop in national sales tax data as concerning for those “sales tax” states. Specifically for Texas and Florida, they both continue to benefit from unique demographic trends and their sales tax collections are likely to outperform national trends. Given only modest declines in national sales tax collection data, we do not believe there are noteworthy credit implications for individual states at this time.
Total State Revenue Trends Remain Stable
Supported by growth in personal and corporate income taxes, overall State revenue trends are stable-to-slightly positive. While we do not expect revenues to continue to climb, the trend in State Tax revenues remains healthy, and a good proxy for the stability in overall muni credit conditions.
This commentary reflects the opinions of Appleton Partners based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information. Specific securities identified and described may or may not be held in portfolios managed by the Adviser and do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed are, were or will be profitable. Any securities identified were selected for illustrative purposes only, as a vehicle for demonstrating investment analysis and decision making. Investment process, strategies, philosophies, allocations, performance composition, target characteristics and other parameters are current as of the date indicated and are subject to change without prior notice. Registration with the SEC should not be construed as an endorsement or an indicator of investment skill acumen or experience.
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