California Sales Taxes Rise, Prospects for Economic Growth Fall

As if economic conditions were not bad enough, California’s sales tax rose another cent on the dollar on Wednesday. That brings the base state sales tax rate to 8.25% (technically, 7.25% plus an additional 1% that is returned to local governments)–an actual increase of nearly 14%. Adding in local sales taxes brings the total sales tax to an average of almost 9% for the state, among the highest rates in the nation.

Sellers of big-ticket items like cars, furniture, appliances, and electronics flooded the airwaves across the state recently with advertisements encouraging prospective customers to buy before the sales tax went up.

In Pico Rivera, which adopted a 1% local sales tax for crime-fighting and other services last November, as well as a 0.5% sales tax increase for transportation that will go into effect July 1, the total sales tax will soon be 10.75%, the highest rate in the state and only slightly below the 11% rate, imposed by a handful of small Arkansas towns, that is the highest in the nation. South Gate has also broken the 10% barrier, with a total sales tax rate of 10.25%. Business owners in these cities are rightly concerned that consumers will do their shopping in nearby cities with lower tax rates.

And taxes may be increased further, depending upon the fate of ballot measures on the state’s May 19 special election. Proposition 1A would impose a spending limit, but only if voters agree to extend the recent “temporary” tax increases for an additional year or two, at an estimated cost of $16 billion. Under 1A, the sales tax would remain in effect for one additional year (until July 1, 2012).

Although the sales tax increase is intended to bring more revenue to the state, which is, once again, struggling to maintain a semi-balanced budget, it may have a muted effect at best, as consumers avoid the taxes through online purchases or simply spend less and save more in order to better manage their finances during the recession. According to Cal State Channel Islands business and economics professor Sung Won Sohn,

“The sales tax increase that the state envisions will not be as high as it is because sales will be lower than they think. Today, people are super price-sensitive and now the price has gone up while your income is falling and jobs are disappearing.”

Californians already pay among the highest state income tax rates in the nation. Now we pay some of the highest sales tax rates as well. The problem with the state’s ongoing budget problems is clearly not on the revenue side. Moreover, tax increases will only prolong the recession in the state at a time when it is experiencing double-digit unemployment and an already-dreadful business climate. Only by reducing the governmental burden on taxpayers through tax and spending cuts will California be able to get back onto a path of economic growth and prosperity.