Funding Regional Transportation with Sales Tax Revenue

Infrastructure is the foundation of economic activity. It takes many forms, including highways and roads, water and sewer, telecommunications, airports, and border facilities.

Many forms of infrastructure are meant to be widely and easily available to users. Funding for this infrastructure through user fees, fee-for-service mechanisms, gas, and other related-input taxes, however, is insufficient to maintain it or expand it due to the level of use vs. associated infrastructure costs. In response, most jurisdictions rely on a variety of federal, state, and local funding sources. Sometimes local revenues are raised through a broad-based tax, such as a sales tax levied on a wide range of purchases. This tax revenue, therefore, is a tool to fund infrastructure and/or transit which translates to regional investments.

The Tucson Metropolitan Statistical Area (MSA) and many of the comparable MSAs listed on the MAP Dashboard partially fund transportation infrastructure with a sales tax. These MSAs are listed in Figure 1, along with metropolitan (or county) population and per capita personal income for calendar year 2019. The Tucson MSA is composed of Pima County.

Figure 1: MAP Regions with Sales Tax Revenues to Support Transportation

Figure 2 shows the relevant transportation sales tax rate and revenues for the fiscal (or calendar) year before the COVID-19 pandemic began. We show total revenues, as well as revenues on a per capita and on a per dollar of personal income basis. We focus on pre-pandemic revenues in order to avoid disruptions caused by the outbreak. Note that the sales tax jurisdiction sometimes differs from the metropolitan area boundaries. See the detailed descriptions below for more.

Revenues for most regions are reported for fiscal years, with the exception of Denver and Las Vegas, which are on a calendar year basis. Most fiscal years end on June 30 of the year and begin on July 1 of the prior year. For example, for the Regional Transportation Authority (RTA) of Pima County, fiscal year 2019 began on July 1, 2018, and ended on June 30, 2019. The exception here is Austin, where the fiscal year ends on September 30.

As the figure shows, sales tax rates varied from a maximum of 1.05% (Salt Lake County, Utah) to a minimum of 0.375% (Clark County, Nevada).

Revenues generated directly from the sales tax ranged from $662.4 million in Denver’s Regional Transportation District (RTD) to $17.1 million for the Pinal County Regional Transportation Authority. On a per capita basis, Salt Lake County raised the most revenue while Pinal County raised the least. Per $1,000 of personal income, Salt Lake County raised the most revenue while Pinal County raised the least.

Figure 2: Transportation sales tax revenues in 2019 for MAP Regions

Figure 3 shows the distribution of total revenues by jurisdiction and the applicable sales tax rate, ranked by pre-pandemic revenues. Note that for total revenues, little association occurs between the tax rate and total revenues.

Figure 3: Transportation sales tax revenues in 2019 by metropolitan area and applicable tax rate (ranked by revenues in millions)

The big differences in revenues across regions reflect different sales tax rates, economic and demographic characteristics, and other differences across regions. Part of the reason that the Regional Transportation District in Denver raised more sales tax revenue than the Pinal County Regional Transportation Authority is because the tax rate in Denver was double the tax rate in Pinal County. But that was not the only reason. Denver is also a much bigger economic area. In 2019, Denver’s population was near 3.0 million, while Pinal County’s population was less than 500,000. Further, per capita income in 2019 in Denver was more than double per capita income in Pinal County.

Let’s take a closer look at revenues across regions and try to account for differences in population and income. First, we can control for the impact of population size by calculating per capita revenue. Figure 4 shows the results. Revenues were highest in Salt Lake City, at $263.7 per person, and lowest in Pinal County, at $36.9 per person. Revenues in Tucson were $82.9 per person, while revenues in Maricopa County were $104.0 per person. Notice that jurisdictions with lower sales tax rates tended to have lower per capita revenues, with the exception of Clark County, Nevada. More on that later.

Figure 4: Transportation sales tax revenues per capita in 2019

Revenues per capita may differ across regions because income varies significantly across regions. Note that the per capita revenue is different than the per capita personal income. Figure 5 shows transportation tax revenues per $1,000 of personal income in 2019. Revenues were highest in Salt Lake City at $4.76 per $1,000 of income. Revenues were lowest in Pinal County at $1.15. Revenues per $1,000 of income in Tucson were $1.82, while revenues were $2.09 in Maricopa County. Again, Clark County, Nevada, with the lowest sales tax rate, posted relatively high revenues per $1,000 of personal income.

Figure 5: Transportation sales tax revenues per $1,000 of personal income in 2019

Note that even on a per capita or per dollar basis, transportation sales tax revenues differed significantly across regions. Why might this happen? There are many possibilities. Clearly, differences in sales tax rates are a big part of the story. But they are not the only differences across regions.

Sales taxes rely on sales tax bases, which means that for any given jurisdiction, some items are subject to tax and some are not. These choices vary across regions. For instance, transportation sales tax revenues in Denver include both sales and use taxes. Further, as individuals age, they typically spend more on services like health care which are usually not taxed. Thus, jurisdictions with older populations will experience lower per capita revenues and per dollar of personal income revenues, other things being the same.

In addition, some regions depend on tourism more than others, which can boost taxable sales per capita and per dollar of income. This is likely a major reason for the strong revenue performance of Clark County, Nevada (Las Vegas).

In fiscal year 2019, a portion of online sales (marketplace facilitators and remote retail sellers without a physical presence in a state) was not subject to sales tax. Thus, regions with more exposure to remote retail sales would tend to have lower sales tax revenues per capita and per dollar of income, other things remaining constant.

Within Arizona, we might expect per capita and per dollar revenues to be similar. For Maricopa and Pima counties, revenues are fairly similar once we account for differences in population and income. The remaining differences might be related to different exposure to tourism, differences in the availability high-cost luxury and industrial items, and other differences.

Even after adjustment for population and income, revenue for Pinal County remains low. In part, this reflects the fact that the relevant sales tax base is narrower. It includes only retail sales and the tax is levied on the first $10,000 for individual items. This matters for sales of big-ticket items like vehicles.

In addition, the difference may reflect Pinal County’s strong economic and commuting connection with Maricopa County. Pinal County residents likely do more shopping in Maricopa County than Maricopa County residents do in Pinal County. Further, Maricopa County probably benefits more from tourist expenditures than does Pinal County.