Speaker's Commission
State Seal
Dan Walters: Taxable sales in long slide

(Published Dec. 17, 1999)

With California's economy booming, merchants are accommodating a wave of Christmas shoppers for what is traditionally the busiest -- and presumably most profitable -- retail sales period of the year.

California shoppers are expected to reach a milestone during the fourth quarter of 1999: topping $100 billion in quarterly taxable sales for the first time. And standing just behind retailers are state and local government officials who count on sales taxes -- about $25 billion a year -- to finance their budgets.

The ringing of cash registers, however, masks an ominous trend for both retailers and politicians: a long-term decline in Californians' purchases of taxable goods vis-a-vis other forms of spending. Taxable sales are still rising, but their growth scarcely keeps up with inflation and population growth.

Data maintained by the state Board of Equalization, which collects sales taxes, quantify the stagnation. Taxable sales during the all-important fourth quarter have risen by only about 5 percent since 1992 after adjustment for inflation and population growth, even with the state's strong economy.

State sales and income tax revenues were roughly equal a decade ago but those from income taxes are now two-thirds higher.

And state budget planners project that the gap will widen as sales tax revenues trail the growth of personal income taxes during the next five years.

Two major forces are converging to create this phenomenon: a significant and accelerating shift of retail sales from stores to catalogs and/or Internet outlets and the aging of the state's relatively affluent white population.

The former is already generating political debate over whether the federal government should force the collection of state sales taxes on catalog and Internet sales.

The second factor has received less attention, but may have more long-term impact. As people age and their children leave home, economists say, they shift income from buying things -- cars, clothes, TV sets, etc. -- to savings and non-taxed services, such as contracting for lawn care rather than buying a lawn mower. The need for such services also increases with the infirmities of age and California's white population is aging rapidly as the huge baby boom generation settles into middle age.

Whatever these trends mean for merchants in terms of competition, they will have a serious impact on state and local governments. The state will become even more dependent on income taxes, especially capital gains taxes, which are more volatile and unpredictable than sales taxes. And local governments will find that the extraordinary efforts they make to attract big box retailers, auto malls and other generators of sales taxes will reach a point of sharply diminishing returns.

There are steps that could be taken to offset these trends, such as allowing local governments to share the growing personal income tax base, expanding the sales tax from tangible goods to services, or boosting sales tax rates.

Promoters of a state "bullet train" system envision a sales tax boost to finance it, highway advocates want to make it easier to pass local sales tax overrides for road construction and teachers pushing a ballot measure next year imply that they would raise sales taxes to bring state school spending into line with national averages.

But California's sales tax burden is already among the nation's highest and any increase would create still another disincentive for consumers to buy taxable goods, intensifying the underlying dilemma. Simply put: You can load only so much straw on a camel -- especially an aging and lame camel -- before its back breaks.

DAN WALTERS' column appears daily except Saturday. Mail: P.O. Box 15779, Sacramento, 95852; phone: (916) 321-1195; fax: (781) 846-8350; e-mail:

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