California Sales Tax Back in the Spotlight: LA and SF Would Have Double-Digit Rates

During the summer, Governor Schwarzenegger proposed a temporary sales tax hike to close the expected budget gap, but he settled for other reforms when opposition was fierce to raising the state’s highest-in-the-nation sales tax. Now budget projections show a larger gap, so he’s back, this time with a larger tax hike.

Instead of an additional 1 percent, he wants 1.5 percent, a hike that he would like to expire after three years. It’s accompanied by several other taxes and a host of new spending cuts as well.

But the sales tax is the big provision. If enacted as proposed, it would put Los Angeles and San Francisco into double digits when their local rates are tallied. LA’s sales tax just went up from 8.25% to 8.75% with Prop R’s passage on Tuesday. Under Schwarzenegger’s plan it would go to 10.25%, tying Chicago for the nation’s highest rate (aside from a few small resort towns and college towns). San Francisco would end up at 10%.

As we’ve written before, a better approach to raising the revenue would be to apply the current rate to goods and services that are currently exempt. The governor’s plan does some of that so-called base broadening, but the biggest exemption, groceries, isn’t mentioned. Taxing groceries is routinely criticized as hard on the poor, but in fact food stamps solve most of that problem. Those could be expanded if necessary, and still the tax on groceries would raise between $4 and $5 billion a year. California tax scholar Annette Nellen, a favorite of liberal-leaning think tanks, has written along the same lines.