Speaker's Commission on State / Local Government Finance

Problems Loom For Sales Tax

By Dan Walters (Published July 9, 1999)

Pennies may be more pocket trash than valuable coinage these days, but those tiny monetary units add up when counted as taxes on retail sales.

Californians will spend about $400 billion this year on taxable goods such as clothing, cars and appliances and each penny of sales tax will, therefore, generate a whopping $4 billion in revenue.

Local governments receive exactly 1 cent from every $1 in sales, returned to the local jurisdiction in which the sale occurred. And sales taxes, while relatively unimportant to counties, have become vital to cities with the erosion of property taxes due to Proposition 13 and a later shift of property revenues from local governments to schools.

The emergence of sales taxes as a pivotal city revenue source gave rise to another phenomenon: so-called "fiscalization of land use." City governments, it's been expostulated, tend to favor sales tax-producing developments such as shopping centers and auto malls over housing or even job-heavy industrial projects.

There's been a running debate in government and political circles over what to do, if anything, about the bias toward retail development. It even crept, ever so lightly, into last year's gubernatorial campaign.

Should sales taxes be distributed to local governments on the basis of population or some formula other than the point of sale? Should local governments share sales taxes from developments within regions? Or should the state take an even bigger share of the sales tax and restore a stronger stream of property taxes to local governments to equalize the land use competition?

Oddly, despite the multibillion-dollar stakes involved, much of the debate has been based on mere anecdotal evidence, rather than hard fact. Finally, however, those who take local government finances seriously have been given a valuable jolt of research.

Elisa Barbour and Paul Lewis, researchers at the San Francisco-based Public Policy Institute of California, have completed an extensive examination of the sales tax that establishes some solid facts, demolishes a few myths and raises some red flags on the future of sales taxes.

The most important fact emerged from a person-by-person survey of top city officials in California: fostering sales tax-generating retail development is, as widely suspected, their top priority.

The most important myth, however, is that in promoting retail projects, city officials are neglecting housing or job-heavy industry. The chief effect is competition among cities in a region for projects that would have occurred anyway, say Lewis and Barbour. In other words, retailers want to locate in a region where their sales will be the strongest and may choose one specific site over another on the basis of subsidies or other factors, but overall land use patterns are not affected markedly.

If cities are, in effect, chasing their tails in competing for a supply of retail outlets limited by market conditions, they're also pursuing a revenue source that is questionable in the longer run.

Californians are spending ever-smaller portions of their personal incomes on taxable goods, thanks to an ever-expanding roster of exemptions created by a Legislature attuned to special interests, to a shift of retail sales from physical stores to mail order and Internet sellers, and, finally, to societal changes, including the aging of the population, that shift spending from taxable items to untaxed services.

The Barbour-Lewis study implies that fiscalization of land use may not be as big a problem as many had said, but that the stagnant sales tax itself may be a bigger headache for city officials.

DAN WALTERS' column appears daily except Saturday. Mail: P.O. Box 15779, Sacramento, 95852; phone: (916) 321-1195; fax: (916) 444-7838; e-mail: dwalters@sacbee.com

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