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Copyright 1997 by the Wyoming Department of Employment, Research & Planning

Work, Pay and Consumer Spending

Part One: Sales Tax Collections and Total Payroll

by: David Black and Mike Evans

Sales tax collections provide an important source of revenue to state and local governments, but they also provide valuable information about the performance of Wyoming’s economy. Since the data from sales tax collections are available sooner than many other data sources, except current employment, unemployment insurance claims (initial and continued) and local area unemployment statistics, sales tax collections are a useful early source of information about Wyoming’s economy. Estimating economic activity with sales tax is useful, because sales tax covers many business transactions. Sales tax measures consumption of goods by consumers and businesses. Economic theory tells us that spending by consumers is driven by their incomes; as individuals receive income they save some and spend the rest. In this article we will examine the relationship between sales tax collections and total payroll1, which is one measure of income.

We can quantify this relationship by using regression analysis2. Total payroll and tax information for all firms covered under unemployment insurance is submitted quarterly by employers to the Department of Employment and is the single largest component of Gross State Product (GSP). If we know employment and payroll are growing, we also know how quickly the demand for goods and services in Wyoming is growing. One can obtain estimated gross taxable sales for analysis by dividing sales tax collections by the sales tax rate. We adjusted the sales tax data from monthly to quarterly, and also adjusted for the fact that the month the Department of Revenue reports the data represents sales two months earlier.

Total Payroll is associated with gross taxable sales due to the relationship between income and consumption. Consumers are restricted in the amount they consume by the amount they earn. We specify the relationship in this way because we expect that total payroll will be responsible for gross sales and not the other way around. As total payroll rises so rises gross taxable sales, and as total payroll decreases so does gross taxable sales (see the Figure).

Tourism influences third quarter total sales and so was included to explain increases and declines in the third quarter. Regression analysis showed total payroll and the third quarter (as a dummy variable) were both statistically significant3 variables at the one percent level (t-statistic3) in explaining estimated sales, and explained 82 percent of the variation in estimated sales tax (see the Table). The coefficients in the Table show the percent change in gross taxable sales, per percent change in total payroll. For instance, a one percent increase in total payroll is associated with an increase in gross taxable sales of 1.05015 percent.

Intuitively we know that increases in gross sales of greater than one percent from increases in total payroll of only one percent are unsustainable. Since we are using total payroll data, we are excluding several sources of income including proprietors’ income, dividends, interest, rental income and transfer payments. These sources of income increased faster than total payroll over the sample period 1990 to 1995, increasing consumers’ discretionary income faster than total payroll. Because discretionary income would have grown faster than total payroll, estimated sales could have grown faster than total payroll.

Other sources of discretionary income or sources of spending include: unexpected bonuses, substantial increases in tourism and a substantial decline in interest rates from 1990 to 1994. Many households took advantage of this and refinanced their mortgages and/or other debt payments. Refinancing reduced their interest payments and freed up a greater portion of their income for discretionary purposes. Again, discretionary income would have grown faster than total payroll.

The third quarter variable shows us that in the third quarter we can expect estimated gross taxable sales to be 10 percent higher than they otherwise would be based on total payroll alone. Tourism in the third quarter is higher than in any other quarter of the year and impacts gross sales significantly, although typically, the second and fourth quarters have the highest total payrolls.

Although the equation explains a great deal of the variation in estimated gross taxable sales by using total payroll, we should use it with caution. Several sources of income are excluded by using Total Payroll. More investigation into some possible explanations of the greater than one percent increase in total sales from an increase of one percent in Total Payroll is needed.

If we include employment in the analysis, we can explain more of the variability with gross sales tax at 93 percent. Next month, we will examine the association and the use of current employment statistics as a proxy to total payroll and gross taxable sales, to estimate gross taxable sales for state revenue projections.

David Black is a Senior Economist with the Department of Administration and Information's Economic Analysis Division.

Mike Evans is a Senior Economist, supervising Bureau of Labor Statistics (BLS) programs with Research & Planning.

1 For an explanation of total payroll, refer to the article Unemployment Insurance Covered Employment and Wages for Third Quarter 1996 in the April 1997 issue of TRENDS.

2 For an explanation of regression analysis, refer to the article Wyoming Housing and Home Improvement Markets: An Economic Indicator in the December 1995 issue of TRENDS.

3 For an explanation of statistically significant and t-statistic, refer to the article Where Does the Wyoming Worker Come From? in the November 1996 issue of TRENDS.

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Last modified on June 6, 2001 by Valerie A. Davis.