Does Broadband Shrink Local Tax Revenue?

[imgbelt img=Dewey-Western-Heritage340.jpg]Are extension of broadband Internet and e-commerce drying up local sales
tax revenues? A new study in Oklahoma says no — at least at this


several researchers, Goolsbee included, have estimated the loss of sales tax collections to be small. But with so much at stake for local businesses and for communities should tax revenues decline, significant concern still exists about the effects of e-commerce. Last year legislation known as the Main Street Fairness Act was introduced to the U.S. House of Representatives focusing on both the potential tax revenue lost and the issue of equity between online and bricks-and-mortar stores.

While most analysis has considered how broadband access might hurt local retailers, there is evidence to suggest that broadband has both advantages and disadvantages for local stores.

Why Broadband Might Hurt Local Retailers

In addition to the price advantage of not having to pay sales tax noted above, there are a number of other reasons why consumers might prefer online retailing to shopping at more traditional physical locations.  These include the ability to shop for lower prices among many competitors, convenience, access to previously unavailable goods, time savings, or simply avoiding the hassle associated with crowds and travel.

Recent statistics back this up, with 93% of Internet users indicating that they had performed some type of activity related to e-commerce. A 2010 study  found that higher levels of broadband adoption have led to higher likelihoods of purchasing online. 

Why Broadband Might Help Local Retailers

Yet some surveys have suggested that local retail stores might actually benefit from higher levels of broadband adoption.  Many consumers use the Internet to help them shop locally, an activity known as “research online, buy offline.”   Surveys conducted by BIGresearch, Forrester, and comScore have all found a high incidence of this manner of shopping.  Consumers may browse and buy this way for any number of reasons, including the desire to see or touch an item before purchasing, immediate gratification, or support of local establishments. 

How Do You Figure Out What Role Broadband Plays? 

In order to determine whether increasing levels of broadband have impacted sales tax collections, we looked at data from two distinct periods.  In 1998, broadband access was a rarity – in fact, less than 5 percent of households had access when the first surveys on the topic were conducted in 2000 (Pew Internet, 2010).  Therefore, we assumed that broadband use was negligible in 1998.  A decade later, however, broadband access had become widespread, with over 50 percent of households adopting high-speed Internet technology by 2008.  Moreover, data on county-level broadband adoption became available for 2008 from the Federal Communications Commission. FCC’s data is broken into five categories that represent the number of fixed broadband connections per 1,000 households, lowest to highest:

•    Category 1:  0 < x <= 200     (0 – 20%)
•    Category 2:  200 < x <= 400    (20 – 40%)
•    Category 3: 400 < x <= 600     (40 – 60%)
•    Category 4: 600 < x <= 800     (60 – 80%)
•    Category 5: 800 < x        (80 – 100%)

Figure 1 shows the level of broadband adoption in Oklahoma in 2008.  Some areas, notably those around Oklahoma City, show very high levels of adoption, while others (particularly in the southeastern part of the state) have very low levels. 

The Wildwood

Western Days 2010 in Dewey, OK (Washington County). This county had high levels of broadband adoption and decreased sales tax revenues between 1998 and 2008, but the same pattern doesn’t hold across the state.

To test statistically whether increasing broadband rates had any impact on retail sales tax collections, we collected data on a number of variables that could affect sales tax income for all 77 counties in Oklahoma in both 1998 and 2008.  We considered features such as the county tax rate, household income levels, age levels, and presence of a Wal-Mart store, converting all variables to 2008 dollars using inflation indices from the Bureau of Labor Statistics.

While the per capita retail sales tax collected increased dramatically over this time period, several other measures also showed increases:  county tax rates, the number of Wal-Mart stores per county, the poverty rate, and the level of broadband access. 

To determine which of these various increases actually impacted the amount of retail sales tax collections, a technique called “first-difference” regression was used.  This technique models the change in a particular variable (in this case, per capita retail sales tax collected) based on changes in other variables that might have impacted it over that time.  Only some variables will be statistically linked to the rise in per capita retail sales tax collections.  The remaining, insignificant variables can be said to have no effective impact on the retail sales tax collections (for more detail on the study and methodology, see Whitacre (2011)).

So, which variables were determined to be “statistically significant?”  Only two:

•    Tax Rate
•    Poverty Rate

Interestingly, only these two variables (higher rates of taxes and higher poverty levels) had any impacts on the changes in retail sales taxes collected over this period.  The higher rates of taxes contributed to higher tax collections, while the higher poverty levels in 2008 decreased the levels of tax collections.  Notably, the higher levels of broadband adoption played absolutely no role in the changes that were seen in retail sales tax collections.  This pattern held when a separate analysis was done on only non-metropolitan counties in the state. 

As local governments face new pressures to pay for their hospitals, police, and other necessary services and infrastructure, the prospect of diminished sales tax collections is ominous. E-commerce has been looked at with suspicion, as a potential threat to local viability. The results shown here suggest that broadband access and Internet sales have thus far not decreased sales tax revenues. Tax collections have not varied in any way based on broadband adoption trends.

Communities can confidently offer educational programs to residents about the benefits of broadband, including encouraging participants to shop on the Internet as they feel comfortable. Some will buy online, and others using the Internet as an auxiliary source of information, will  buy products locally.  However, e-commerce’s percentage of total retail sales has been trending upward for an entire decade. A continuation of that trend over the next decade could change the findings here. 

Brian Whitacre is an Associate Professor and Extension Economist and Lara Brooks an Assistant Extension State Specialist at Oklahoma State University.
Their findings were published in Regional Science Policy & Practice, April 2011.