Los Angeles Looks to Top Chicago’s Sales Tax

August 14, 2008

Bob Schmidt

Bob Schmidt

As stated in an earlier blog, Chicago recently increased local sales taxes, making rates in the city 10.25%. The rate, which is the highest in that nation, may soon rank second to Los Angeles. The current sales tax in Los Angeles is 8.25%, which breaks down as follows:

6.25% State sales tax
1.00% State mandated local sales tax (which funds, in part, local government)
1.00% Local sales taxes levied by Los Angeles County
8.25%

Governor Schwarzenegger recently proposed a temporary 1 cent sales tax increase to help close the state’s budget gap (blogged about here). This would raise the local sales tax to 9.25%. A proposal by the Metropolitan Transit Authority (MTA) to increase county sales taxes by a half-cent would place the rate at 9.75. An additional 1 cent sales tax goes into effect in October for residents of South Gate, with Pico Rivera and Maywood having 1 cent increases on the ballot in November. After the elections, the sales tax in several cities may look like this:

8.25% Current sales tax
1.00% Temporary state sales tax
1.00% New city option sales tax
0.50% MTA sales tax
10.75%

Current limits cap the sales tax at 9.25%, but the ballot initiative includes authorization for the rate hikes. Given the current budget politics in California, it is unlikely all the tax increases will occur. The MTA tax increase requires approval from the state legislature, Governor Schwarzenegger and county residents. Citizens aside, Schwarzenegger and the state house agree on very little regarding fiscal policy.

Instead of raising rates, the cities and county could explore modifying the sales tax base. California exempts many goods and services from sales taxes, such as groceries and haircuts. By expanding the sales tax base, California and its localities can generates larger revenues at the same tax rate, or lower the rate through a combination of spending cuts and repealing exemptions.

Travel Hint: If you’re planning a vacation to Chicago or Los Angeles, you may want to consider shopping and dining outside the city/county limits.

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A 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.

The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A 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.