Whither the Sales Tax?

I spent my childhood in the Central San Joaquin Valley where summers are hot. Not quite California desert hot, but it wasn’t unusual to have days-long stretches of 100-plus degree temperatures. Luckily, my parents had a pool and we did not hesitate to use it. In fact, we spent most of our summer days in swimsuits and, occasionally, sunscreen. My dad also spent a good amount of time maintaining that pool, dripping liquids into a plastic doodad to test the chemicals in the pool water. Then he swished in some chlorine, maybe, and brushed and skimmed. It was slightly interesting, but time-consuming, and remember, very hot out. I don’t know that he ever thought he had any other option, he just did it.

I live with my own family in Yolo County now. While we don’t quite experience the summer heat of my hometown (thank you, Delta breeze), we also have a pool and my kids love it. But we’ve never practiced pool chemistry; for a reasonable fee, I’ve got a guy that takes care of it for me.

This little story is meant to illustrate how Californians have changed as consumers.

Back in August, the Legislative Analyst’s Office released an interesting report that flew under the radar a bit: “Why Have Sales Taxes Grown Slower Than the Economy?” In it, the LAO explores the changes in consumer spending patterns and the effects of those changes on sales tax revenues. Sales taxes are important sources of funding for state and local governments, and are particularly important to counties, as sales tax revenues comprise the majority of funding for 2011 and 1991 realignments.

The LAO looked back to 1980, about when my dad was moonlighting as a pool chemist, and examined the patterns of prices and purchasing through 2012. Today, Californians spend a greater share of their income on untaxed services than they did in the past. This spending has shifted from purchases of taxed goods. Further, taxable goods have become less expensive relative to nontaxable services; consumers can buy the same amount of taxable goods with a smaller share of their income. The “savings” can then be spent on relatively more expensive nontaxable services.

This change in consumer behavior, then, is reflected in sales tax revenues received by the state and local governments. Since 1980, sales tax revenues have grown more slowly than the state’s economy, even when taking into account periodic increases in the state and local sales tax rates during this time. Had sales tax revenues kept up with the state’s economy over that time period, the sales tax would generate the same amount of revenue for state and local governments as it does today at a much lower rate (5.2% instead of the current 8.4% rate). If instead the rate were unchanged, the sales tax would generate 61 percent more revenue than it does today.

LAO anticipates this trend to continue in the near future. So what then? Is it time to revisit the way we tax consumer spending in this state? It’s something for counties to think about, particularly when sales tax revenues fund a wide range of public services in our communities.

About: Jean Kinney Hurst:
Jean Kinney Hurst is CSAC's Legislative Representative for Revenue and Taxation. She can be reached at jhurst.at.counties.org.

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