Taxable Retail Sales per Capita: Measuring Retail Leakage

by Dr. Patrick Jones

This time of year “shop local” is a common call throughout eastern Washington communities. The motivation is clear:  spending your hometown sends positive ripple effects throughout a community. These include local jobs, local taxes and an inviting ambience of downtown shopping districts. Yet a significant portion of purchases by local residents takes place beyond the boundaries of Walla Walla County.

Economists refer to out-of-county spending as “retail leakage.” Locally “owned” dollars slip out of local circulation. And the ripple effect goes into reverse. Quantifying these effects is not easy. Unlike Idaho, Washington State, through the Department of Revenue, does report retail sales taxes by county. But they are hardly tagged by residence of the buyer.

As often is the case in economics, the only way to measure is an approximation. The Trends uses the proxy retail sales per capita, here and in adjacent counties. The logic – if retail sales per resident are higher here than in adjacent counties, then it is likely that there is a net inflow of shoppers relative to those adjacent counties. Or, if retail sales per capita are equal here to those in adjacent counties, then the net effect of “cross-border” shopping is neutral. For this indicator, the relevant adjacent counties are Benton and Franklin.

For this proxy approach to be valid, factors that lead to retail spending should be roughly similar in Walla Walla and the greater Tri Cities. At least four come to mind.

The first concerns incomes: they need to be roughly the same here and in adjacent counties. Why? Spending is largely driven by income. If the neighboring market enjoyed higher incomes than the county of interest, then we would expect higher retail sales per capita there from the factor alone. From Trends indicator 1.1.1, we know that for 2018, per capita income in Walla Walla County was $48,160. Via a similar project for the greater Tri Cities,  we know that this measure in 2018 was $44,256. So incomes measured this were about 10% higher here than in the two counties to the west.

From Trends indicator 1.1.2, we know that median household income (MHI)  in Walla Walla & Columbia Counties was estimated to be $59,704 in 2018. The estimate of MHI for the greater Tri Cities last year was $64,908.  Here, incomes in the counties to the immediate west were about 10% higher. So one measure puts Walla Walla slightly higher, the other slightly lower. In all, incomes here and the comparison counties are approximately similar.

Besides income, age plays a role in spending patterns. The very young don’t have much disposable income to spend. The older population’s market basket of goods and services is generally smaller and tilted toward personal and health care services that are usually not taxed in our state.  So to check the approximate equivalence of the population that spends, one needs to consider the shares of age groups 18 through 64.

Indicator 0.1.3 reveals for 2018, that these ages made up about 61% of the county’s population. This was within 10% of the share of these ages in Benton and Franklin Counties in the same year, or about 58%. So, any distortion due to age-related taxable retail spending patterns seems modest.

A third condition that should hold is similar “tourist intensity.” Communities promote tourism largely for their spending impacts. If one community shows much higher tourist spending level per resident, then any conclusions on leakage will be biased. The Trends contains a measure of this, both here and for the greater Tri Cities. Indicator 1.4.4 notes that 2018 estimated tourist spending per resident in Walla Walla County was $2,534. This level is roughly the same as in the Tri Cities for the same year, which registered $2,318, or less than a 10% difference. So, tourism brings little distortion in the comparison.

A final assumption is that other counties don’t play much of a shopping role in the comparison counties. To the degree that residents of Yakima County shop in the Tri Cities, this isn’t true. Umatilla County shoppers appear about equidistant from Walla Walla and the Tri Cities. By distance to shopping, it’s difficult to imagine too much effect there, although Tri Cities certainly offers more shopping choices for them. This is the one factor that renders the comparison in indicator 1.1.1 a little biased.

What, then, does retail spending per resident in Walla Walla tell us? First, it is and has been lower here than in the greater Tri Cities. For 2018, taxable retail sales per person here was about $7,200, versus about $9,000 in Franklin County and about $10,700 in Benton County. Or, retail spending per resident here came in at 80% of the levels enjoyed in Franklin County and 67% in Benton County.

This represents an improvement over the prior year. Retail spending per resident here versus Franklin County was 73% in 2017. It was lower yet, compared to Benton County, at 63%. Were it not for the dramatic rise in taxable retail spending here in 2018, as indicator 1.2.1 clearly shows, results in 2018 would have been similar.

The long-term assessment is one of little improvement for Walla Walla. In 2004, the start year of the indicator, the ratios of per resident spending here to those in the Tri Cities were nearly the same. Yet, the past five years have witnessed a much faster growth rate of retail sales/resident – 27% cumulatively, than the prior five years, which was 5%.

It comes likely as no surprise to readers to learn that sales tax reports clearly show flow of retail spending dollars out of Walla Walla to the Tri Cities. This is typical result for a smaller geography adjacent to a larger population base. Currently, the population ratio between the greater Tri Cities and Walla Walla is nearly 5:1.

What might the future hold? The improving outcome of the past five years? Or the stagnant one that starts in 2004? That outcome will depend on the all the factors listed above (and likely more). If increasing taxable retail sales is a goal of Walla Walla, then faster growth of the following factors will be key:  population shares of the 18-64 year-olds, personal income and tourism.