The Sales Tax Base is Just Fine, Thanks

Loren Kaye

President of the California Foundation for Commerce and Education


Dan Walters’ recent column perpetuates a persistent myth about the sales tax. According to Walters, "(T)he 75-year-old sales tax’s stolid image, however, masks long-term erosion of its revenue-producing ability … " Other elected officials, such as BOE Chair Judy Chu, use this argument to support a broad proposal to apply the sales tax to numerous business and personal services.

There’s a small problem with this erosion myth … it’s not true!

Walters compares money raised from taxing retail sales unfavorably to taxing personal income, but personal income has always been a more dynamic revenue producer than retail sales. The more recent phenomenon is the greater volatility of personal income tax revenues, compared with the relative stability of sales taxes.

For the past 30 years, personal income has always grown faster than taxable sales. In fact, during the most recent decade, their growth rates have converged.

   Growth of Taxable Sales Growth of Personal Income
1996-2006  74%  77%
 1986-1996  48%  69%
1976-1986 159% 179%

In fact, since 1992 – the nadir of the aerospace recession – taxable sales and personal income have grown at almost exactly the same average rate, about 5.3 percent a year.

Also since the 1991 recession, taxable sales have contributed – year-in and year-out – to about a third of the California economy – apparently unaffected by the boom in internet sales, baby boomer retirements, or proliferation of services businesses. From 1970 through 1990, taxable sales represented on average about 40 percent of the economy. It is just as likely that the decline in the California manufacturing sector is responsible for this decline in taxable sales base as any change in consumer purchasing patterns.

The notion that the sales tax base must be “broadened to reflect commerce in the 21st Century,” in BOE Chair Chu’s words, is a nonsequiter. The sales tax base is insufficient only relative to how much in taxes should be raised to meet state obligations, not by an arbitrary measure of contribution to the economy. Indeed, if “contribution” was truly the measure of a tax base, then the personal income tax would be flat, rather than its present steeply progressive curve.

Jean Ross, executive director of the California Budget Project makes her case most forthrightly: “Simply put, our tax system doesn’t raise enough money to support the services Californians want and deserve.” The question honestly debated is how big should government and its tax burden be. Arguing over the relative ideal contributions of various economic activities is a smokescreen.

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