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California Commentary

Sales tax increases slam the middle class in California

By Jon Coupal

From the perspective of taxpayers, this month was most notable for the April 15th deadline for filing state and local income tax returns. But just two weeks earlier, many California consumers also had the privilege of paying higher sales taxes.

Although Californians pay sales taxes daily on their retail purchases, it can get a little complicated. For example, it can be imposed on purchases from out of state companies as anyone who shops on Amazon is aware. Also, some essential goods are exempt such as most groceries and prescription drugs.

Forty-five states impose some sort of sales tax. Nationally, they make up 32 percent of state tax collections and 13 percent of local tax collections. From an economic perspective, sales taxes are considered more pro-growth than income taxes. But they are also viewed as regressive because low and middle income taxpayers spend a higher proportion of their income on taxable goods.

At 7.25 percent, California has the highest state sales tax rate in America. But that is just the beginning. Local governments are permitted to levy additional sales taxes and, in theory, the combined rate of the additional local taxes should not exceed 2 percent. However, some local governments have been allowed to go even higher via special "tax authorization" legislation.

The multitude of higher sales taxes imposed throughout California on April 1st were the result of local ballot measures on last November's ballot. Of the 115 sales tax increase measures, 90 passed and 25 failed.

Under Proposition 13, special taxes (taxes imposed for a specific purpose) require a two-thirds vote. Of those special local sales taxes, six passed and eight failed.

Local sales taxes for general, not special, purposes made up most of the proposals last November. 80 of those passed and 16 were rejected, failing to clear 50%.

There was also one special tax proposal which, as noted above, should have required a two-thirds vote. Instead, proponents attempted to exploit the infamous Upland loophole which weakened Prop. 13's requirement. Under that theory, the two-thirds vote requirement would not apply to a special tax placed on the ballot by a "citizen's initiative." But, in a bit of poetic justice, the tax failed to get even a majority vote.

With California's across-the-board high tax rates, it may seem surprising that so many sales tax proposals passed. There may be a few reasons for this.

First, while state-wide tax hikes rarely pass, voters may have more trust in their local governments. But the high rate of passage is also due to how the ballot process is manipulated. Local governments bend over backwards to keep tax hike proposals obscured until the last moment hoping that opposition won't have time to coalesce.

General tax increase proposals will often highlight "essential government services" like police and fire protection. But the fine print reveals that the revenue can be used "for any lawful purpose" including administrative costs, pensions, and travel.

Often, proponents of sales tax hikes are deliberately bad at math. If an additional half cent sales tax is added to an 8% sales tax, that's an increase of over 6%, not a half percent.

California taxpayers may be justifiably focused on California's burdensome income taxes and, notwithstanding Prop. 13, California is still a high property tax state. But it would be a mistake to acquiesce to higher sales taxes without a great deal of scrutiny.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

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Jon Coupal is the President of the Howard Jarvis Taxpayers Association. He is a recognized expert in California fiscal affairs and has argued numerous tax cases before the courts.

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