California’s (Not Unusual) Shrinking Sales Tax

Californians paid sales tax on 53 percent of their purchases in 1979, but on only 33 percent of their purchases today, according to a new report released yesterday by the California Legislative Analyst's Office (LAO). In other words, a tax that ought to apply to 100 percent of final retail purchases actually exempts two-thirds of them, driving up the rate on what IS taxed much, much higher.

It's true and is not just a California thing. Why is this happening? Sales taxes were first created in the 1930s as an emergency measure, and they applied only to the purchase of goods because that's what our economy was back then. Today, the vast majority of our economy is service-based: housing, health care, legal services, accounting services, haircuts, child care, and so forth. Sales taxes haven't kept up, so their base declines as a share of the economy. While the biggest contributor to this drop is not taxing services, two other factors are exempting large categories of goods (groceries, clothing, etc.) and the rise of Internet commerce (still less than a tenth of the economy, but growing).

(Some on the left argue that sales taxes inherently grow slower than the economy, which is not true: it's because a whole lot of stuff has been exempted. Remove the exemption and it grows just as fast as the economy.)

So check out the report and learn why we need to fix state sales taxes!