More on Taxes

As the state’s budget continues its downward spiral, the governor has responded with a proposal to boost the statewide sales tax by 1.5 percentage points. The statewide sales tax is currently 6.25%; they also collect an additional percentage point, which is turned over to the local government where the tax is collected. In Los Angeles County, we also pay two additional .5% taxes for transportation (a third .5% tax will start up next year, thanks to Measure R). That means that, if the Measure R passage stands, and if the governor’s proposal is adopted, L.A. County residents would be looking at a sales tax rate of 10.25%. Municipalities that have adopted additional local sales taxes (El Monte, Pico Rivera) would pay 10.75% and 11.25%, respectively.

The tax applies to the retail sale of most goods (except food and prescription medicines), but does not apply to most services. Under the governor’s proposal, at least some services will be taxed (for example, movie tickets and automotive repair).  Legal services will NOT be taxed.

In my opinion, the proposed boost in sales tax rates is a mistake.  Increasing the sales tax will decrease demand in general, which is not what you want to do in a recession. It will also increase the incentive to buy the things that you can from out of state Internet sites (technically, those purchases are also subject to a use tax equal to the sales tax, but, in practice, most people don’t pay those taxes and it’s not an efficient use of state resources to try to collect the use tax they are entitled to).  When people buy from out of state, California loses both the jobs associated with selling the product within California, and the sales tax the state would have gotten had the item been purchased in-state.

A competiting (or possibly complementary) proposal out of the Legislative Analysts Office is to boost the Vehicle License Fee. This, I would support. The VLF was "temporarily" reduced during the flush days of the dot com boom. When the boom busted, Governor Davis returned the fee back to where it was before the tax cut. Governor Schwarzenegger reversed the fee when he took office, as he had used the VLF as one of the more potent bludgeons against the former Democratic governor.

But nearly all of the VLF goes directly to local governments (counties and cities, just like other property taxes). So after cutting the VLF, Schwarzenegger then had to "backfill" the local government’s lost VLF dollars with money from the state’s general fund.

This results in a big hit for both state and local governments. Rather than a predictable stream of money from the VLF, local governments were forced to rely on the whims of Sacramento for their "allowances" from the state. They also need to rely on sales tax revenues, which are cyclical, and drop when the economy slows down. Meanwhile, the state needs to divert General Fund dollars for the backfill that it could otherwise be using for health, education, and everything else the state does.

A boost in the VLF is fairer than either an increase in the sales tax or an increase in car registration fees (which the governor is also proposing). Unlike the registration fees (which apply equally to all people), the VLF is the equivalent of a property tax, meaning people with more expensive cars pay a larger dollar amount (but a consistent percentage of their car’s value). People with older, cheaper cars pay less. And if you don’t have a car at all (and, hence, don’t impose costs on the state in terms of road maintenance, air pollution, etc., etc), you don’t pay anything at all.

Yes, a VLF fee will increase the cost of new cars. But the effect will be less than if we were to boost the sales tax rate by 1.5 percentage points.

At any rate, that's just me, thinking out loud about, if taxes need to be increased, which ones I'd less opposed to.

More on Taxes

A lot of people thought it was funny that Schwartzenegger has suggested raising the DMV fees.

The last couple years have been one of those times when the people have come off looking stupid. If the big VLF were in effect, it would have not only provided revenue - it would have discouraged people owning an extra car -- something that seemed real sensible when gas was at $4 a gallon.

I think some of the reason why there's support for a sales tax is that some characters out there are pushing for sales taxes. It might be a right-wing talking point, or some kind of "movement" like the flat tax movement. They just support any kind of flat or regressive tax. Then they go around calling the progressive income tax "socialist"!