A tax that doesn't pay - California's sales tax imposes too high a rate on too narrow a base.
CALIFORNIA ONCE again is weeks into a new fiscal year without an enacted budget, as legislators and the governor struggle to close the yawning gap between available revenue and the cost of state programs. One little-discussed cause of that gap: California's sales tax, the second-largest source of state revenue, no longer does the job.
The answer is not to raise the sales tax rate, as some legislators, ballot measures and policy groups have proposed in recent years. California's sales tax rate of 6.25% is already the eighth highest among states -- much closer to New Jersey's top-tier rate of 7% than New York's bottom-rung 4%. (Some states, including Oregon, have no sales tax.) Additional local sales taxes make the rate even higher: 8.25% in Los Angeles, for example.
Further hiking the sales tax rate would hurt low-income individuals, make the state less attractive to businesses -- particularly manufacturers looking to relocate or expand -- and would mark another missed opportunity to move this Depression-era tax from the Industrial Age into the Information Age.
The real problem with California's sales tax, which provides 27% of the state's revenue, is that it imposes too high a rate on too narrow a base. A sales tax is supposed to be a broad tax on consumption, but California's hasn't kept up with changes in the economy. We're spending less on "tangible personal property" -- the 1930s terminology that's still in place -- and more on services and intangibles.
For example, if you buy a CD at Amoeba Music, it'll be taxed. Download the same album from iTunes, and it's not. Buy a computer game at Best Buy and it's taxed; download it online and it isn't. Similarly, California taxes home video rentals but not movie tickets, lawnmowers but not gardening services, pet supplies but not dog grooming.
These changing consumption patterns have eroded the sales tax base. The Center on Budget and Policy Priorities reports that from 1990 to 2003, the percentage of sales subject to sales tax in California dropped by 13.4 percentage points (states' median decline was only 8 points). In 1981, 48% of consumption was subject to the California sales tax, according to the California Legislative Analyst's Office. By 2005, that amount dropped to 38%.
There is no economic rationale for taxing some forms of personal consumption while exempting others. For example, why tax washing machines but not laundry and dry cleaning services? Why tax a game in a box but not one played online?
