During the summer, Governor Schwarzenegger proposed a temporary sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. 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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . 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 broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. , 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.
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