Retailers’ woes mean it’s time to overhaul California sales tax

The Great Recession, as some call it, has a double-barreled impact on California retailers — especially those who sell non-necessity goods.

The collapse of the housing market hit retailers of building materials and home-related goods, such as furniture. And, as many Californians lost their jobs, they and traumatized jobholders cut consumer purchases sharply. For instance, new-car sales, which had once topped 2 million vehicles a year, were cut in half.

A new appraisal of the state budget by the Legislature’s fiscal analyst tells the tale. From 2007 to 2009, it says, taxable retail sales dropped 19 percent while personal income declined by just 2 percent.

Analyst Mac Taylor believes that as the economy slowly recovers, taxable sales are rebounding somewhat. Nevertheless, the sales tax, long a mainstay of state and local government finances, is losing its mojo.

Three decades ago, when Jerry Brown was serving his first stint as governor, taxable sales were the equivalent of 50-plus percent of personal income, and sales taxes were, therefore, the state’s largest single source of revenue.

But during the 1980s and ’90s, taxable sales flattened out relative to income, dropping to well under 40 percent by the early 1990s, and even lower a decade later. And when recession hit a few years ago, it plummeted to just over 25 percent.

To put it another way, a penny of sales tax today generates scarcely half of what it did during Brown’s first governorship, relative to the overall economy. Meanwhile, the personal income tax has soared to become, by far, the state’s prime revenue source. The much-debated Internet sales that evade sales taxes are a small factor. But the big one is a shift in consumer spending patterns, partially due to the aging of the dominant white population, from taxable goods to untaxed services and investments.

Regardless of the reasons, it’s an economic fact. And it has consequences, not only for the retail industry, but also for those who depend on retailers, such as advertising media and governments.

It means cities that use redevelopment debt to lure retail business may be chasing their tails. And it means the state is more dependent on income tax revenues from high-income taxpayers whose incomes, in turn, are largely dependent on rapidly changing stock markets.

It’s why a blue-ribbon commission appointed by the Legislature and former Gov. Arnold Schwarzenegger recommended a broad overhaul of the sales tax that would, in effect, have applied it to services and reduced the state’s ever-increasing dependence on volatile income taxes.

That proposal was shelved, but a conceptually similar overhaul occupies center stage of the new Think Long Committee for California plan for fixing the state’s dysfunctional government.

Dan Walters’ Sacramento Bee columns on state politics are syndicated by the Scripps Howard News Service.

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