Colorado economy: Pandemic has cost state $1B in retail sales, but in some cities revenue is actually up

The pandemic’s downward pull on consumer spending in Colorado is undeniable, but so far declines in retail sales are lower than forecast in many places, with the brunt of losses concentrated in communities dependent on outside spending.

Colorado municipalities captured $1 billion fewer retail sales between January and May of this year compared to last year, which works out to a 2% drop, according to net taxable retail sales numbers reported to the Colorado Department of Revenue and compiled by the Colorado News Collaborative.

But what that number doesn’t show is that for every city or town in the state that had a decline in retail sales, another two showed gains, according to the state numbers. That same ratio applies to county-level retail sales, which were up in 44 counties and down in 20.

The pandemic appears to have shifted spending patterns in a big way. There were 81 towns and cities that suffered a $2.36 billion loss in retail sales. Of those losses, half came from Denver, with another 20% coming from Boulder, Lone Tree, Grand Junction and Breckenridge.

Another 171 towns and cities, however, saw a $1.3 billion gain in net taxable retail sales, something most probably didn’t envision as shutdown orders went into place.

“Initially, we had estimated some huge decreases because we didn’t understand what was going to happen with the pandemic,” said John Lewis, finance director for the city of Fountain, which is south of Colorado Springs.

Instead, the city is in a place it didn’t expect to be, up 19% in June year-over-year in retail sales tax collections and looking at the possibility of having to refund some of the extra money it has collected under TABOR limits.

There were 17 communities, mostly smaller and east of the Front Range, where retail sales more than doubled over last year from January to May. Arvada had the biggest dollar gain in net retail sales, $75.4 million, a 13% increase per the state’s count of retail sales.

“Arvada is a grocery and gasoline community,” said Bryan Archer, Arvada’s director of finance. “Our biggest retailers were all deemed essential.” They included Home Depot, Lowe’s, Costco, Sam’s Club, King Soopers and Safeway.

Retail sales, which were robust in the first three months of the year, did pull back sharply in April. But in May and June they were moving higher again. If it weren’t for auto sales, which fall under a separate “use” tax, the city would be on track for a gain in tax collections this year.

Colorado consumers registered 16.7% fewer new vehicles in the first half of 2020 than they did in the first half of 2019, which works out to 22,286 fewer cars and trucks for local governments to collect revenues on, according to the Colorado Auto Outlook from the Colorado Automobile Dealers Association.

Longmont was planning on a 40% hit to its sales and use tax collections this year during the second quarter of the year, and expected the second half of the year to be down 8%, said Jim Golden, the city’s chief financial officer.

In the first five months of the year, Longmont sales and use taxes were only down 0.6% of what they brought into the city in the same months in 2019.

“That can happen in a tight year even without COVID,” said Golden. “We’ve been lucky so far.”

In March, tax collections were up 6% from the prior year. In April, collections went down 12.7%. But in May, the taxes actually were up 1.6% year over year, which Golden attributes to a couple of large audit collections. Longmont’s revised forecast now calls for only a 6% decline in sales and use taxes in the second half of the year, though collections in June may drop the projected decline even further.

As expected, grocery sales are up, but so are sales at big-box stores, liquor stores and marijuana retailers. The declines came in restaurants as well as auto sales, building permit revenues and equipment purchases, the latter three down 15% through May.

Other places are treading water, which itself is an accomplishment given the severity of the economic contraction. State counts show Aurora’s retail sales up 3% in the first five months, part of which reflects momentum at the start of the year.

January sales tax collections, which include Christmas sales and other December purchases, were up 11% and February collections were up 13%, said Aurora Budget Manager Greg Hays. In March, sales taxes were up 1.7% and then up 1.4% in April, likely because of more robust grocery store purchases as everyone stocked up on toilet paper and hand sanitizer. May saw the city’s second-largest dip ever: 12.6%. The record drop was set in January 2002, Hays said.

June numbers are back up, though only by 0.1%. Many of the places that suffered a major drop in sales in May started to go back up after much of the state began reopening. Clothing stores, for example, were down 94% in May compared to last year but only down 50% in June.

Like Longmont, however, the city is seeing major drops in auto sales. And of course, every city is experiencing shortfalls in lodging tax revenue. Because Aurora doesn’t tax groceries, officials don’t expect to make up any taxes there.

Places that were hit hardest

Communities that relied on retail spending by their own residents did better than those that catered to tourists and outside visitors. Bedroom communities captured sales that had gone to downtown areas and office parks. And those with more drive-through and fast-casual chains fared better than those that skewed toward sit-down restaurants.

Lewis said for years Fountain has struggled with what he called “leakage.” People would head up to Colorado Springs or Denver to make large purchases. But as closures took hold, they spent more dollars closer to home, and they bought more online.

After years of watching revenues from online sales evade them, more local governments in Colorado are now capturing them because of the Wayfair decision. Those newer collections boosted year-over-year comparisons.

Archer offers the hypothetical example of an Arvada resident who needed to buy a computer or tech gear to work remotely. In the past, he or she might have gone to a physical Best Buy location in a nearby city. But because more residents were buying online, it generated tax revenues for Arvada.

But the unexpected gains in retail sales in a majority of places in Colorado were not enough to compensate for the massive declines elsewhere.

In Denver, taxable retail sales went from $7 billion in the first five months of 2019 to $5.8 billion this year, a 17% drop, according to the Colorado Department of Revenue. Leading the declines were restaurants and bars, down 35.7%; clothing retailers, down 35.4%; department stores, down 24.6%, and sports, hobby, music and book stores, down 23.6%, according to numbers from the city.

The pandemic hit Denver’s economy on multiple fronts, turning areas of strength into weaknesses. Tourism dried up and the city’s convention business disappeared. Cultural facilities and sporting venues shut down, removing the sales those visits provided. Thousands of office workers who populated the Central Business District and Cherry Creek remain hunkered down at home, not buying lunches, doing their shopping, or partaking in happy hours after work.

“We anticipate about a $227 million loss of revenue in our general fund in 2020 and believe it will take at least through 2021 to recover to our pre-pandemic economic levels,” said Brendan Hanlon, Denver’s chief financial officer.

Retail sales taxes account for about half of the city’s revenues. Hanlon said he worked for the city during both the 2001 recession and the Great Recession and the budget challenge is unlike any Denver has ever seen, including the Great Depression.

“The city is deploying all the financial management tools available to balance the budget while striving to maintain our city services. Without federal support of local government revenue losses, these financial conditions will result in substantial cuts to municipal budgets which will directly affect our state and national economies,” he said.

Like Denver, Boulder experienced an exodus of white-collar workers who shifted to working at home, including Amazon engineers who now design self-driving carts and robots in their garages.

“One of the challenges Boulder has is that we do have a large proportion of in-commuters,” said Tax and Special Projects Manager Joel Wagner. “When all of those commuters stopped coming into work, we saw a lot less spending in Boulder.”

Couple that with the students leaving because of the cancellation of in-person classes at the University of Colorado, and suddenly, Boulder’s tax base is a lot smaller.

Boulder, which moved quickly to address the pandemic, saw “pretty immediate and rapid declines” in sales taxes from most of its storefront and retail businesses as well as restaurants during statewide closures, he said.

City data show that as of May, its apparel stores, restaurants and furniture stores have seen more than 30% declines in sales tax, year to date. In May, tax collections were down 18.8% year over year. But Wagner notes a “few bright spots” too, with sales increasing in food and liquor. Boulder is also seeing success in a unique area: digital software sales that are taxed.

Beyond the pandemic, Grand Junction has had to deal with a slump in oil and gas activity because of depressed commodity prices earlier this year, said city manager Greg Caton. But its economy is much more diversified than the past, and that has helped. So too have all the federal dollars circulating, whether via the $1,200 per person payments the IRS sent to households, the enhanced federal unemployment insurance payments of $600 a week or the billions in loans made to small businesses through the SBA.

“We are actually faring quite well and better than some of the resort-based communities,” Caton said. Retail sales tax collections were down 25.3% in April, down 8.3% in May, and June, which is still being tabulated, looks flat.

“Given that we are in the pandemic, I feel good about this,” he said.

Not surprisingly, areas more dependent on tourism have taken some of the bigger percentage hits to retail sales, especially the state’s ski resorts and gaming towns.

“We are down $67 million in retail activity, with a 22% drop in sales through May,” said Brian Waldes, director of finance and information technology for the town of Breckenridge in Summit County.

The year was off to a promising start, with retail sales up 2% in January and 6% in February, and then “bang,” the ski resort closed. In April, sales plummeted 65% and were down 44% in May. Lodging taxes were hit even harder.

“Even if you decide one thing, the pandemic could decide another. Our No. 1 plan going into 2021 is to be agile,” Waldes said.

Black Hawk, which relies heavily on gaming for revenues, had limited options once its casinos closed.

“When things get shut down, they come to a screeching halt,” said Lance Hillis, finance director for Black Hawk.

State numbers show a 28% annual decline in retail sales in Black Hawk through May, or a loss of $8.2 million in retail sales. But the town is tracking a much steeper 37% drop in tax collections. In April, during casino shutdowns, sales tax collections went down 85%. In May, it was still a 63.3% reduction, Hillis said.

A call for help

Taxes on retail sales, along with the use tax on auto sales, are key revenue sources in most communities, but not the only sources. Just because retail sales held up better than expected in many places doesn’t necessarily mean that overall tax collections aren’t down.

Aurora, for example, anticipates a continued hit from the recession. Based on projections completed in April, revenues were expected to fall about $25 million short in 2020 and about $30 million in 2021.

The Federal Reserve Bank of Cleveland estimates that municipal governments in Colorado could face a $377 million loss in sales tax revenues this fiscal year, with counties, which are more dependent on property taxes, down $64 million and special districts down $78 million.

And the state won’t be in a position to backstop those losses. The same study estimates a $207 million loss in state income tax collections and a $367 million loss in state sales tax collections.

The Colorado Municipal League surveyed its members during the first week of July and 80% of the 99 who responded said they faced a general fund shortfall which averaged 17%.

A decline in travel has meant fewer hotel stays, hollowing out lodging tax collections. Facility closures and have meant fewer recreation center visits and facility rentals, hurting service fees. Licenses and permitting fees were down in 40% of communities surveyed, and so were utility charges.

The shortfall is severe enough that the Colorado Municipal League has joined counterparts in lobbying Congress for state and local fiscal relief in the next round of federal stimulus, said Kevin Bommer, executive director.

The issue of support for local governments has divided Congress, with Democrats proposing more than $1 trillion in aid, while Republicans are hesitant, viewing the amount as excessive and concerned aid could cover for years of bad fiscal management, including backfilling underfunded pensions.

Local governments contacted for this story said they are cutting costs where they can, with furloughs and delays in capital projects and equipment purchases. In a bid to prevent temporary losses from becoming permanent, some have diverted coronavirus relief funds to support small businesses until sales revive.

“They are trying to put a tourniquet on the wound in the hope that relief comes soon,” Bommer said. But there is a serious concern that help isn’t coming.

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