Sales tax increase remains unpopular option

The Associated Press
Tuesday May 28, 2002


SACRAMENTO — Proposed state budget cuts could leave local governments scrambling for cash to prevent slashing services, and some officials say raising the sales tax may be an unpleasant, but necessary, option. 

Officials in the San Francisco Bay area and across the state acknowledged that the local ability to tack on as much as a cent and a half of sales tax per dollar in some counties is the only way to boost revenues quickly on their own. 

For most urban counties, a sales tax hike could generate tens of millions of dollars a year. But even the slightest mention of such an increase raises hackles. 

“Increasing taxes during an economic downturn is one of the most damaging actions that California can take,” said Larry McCarthy, president of the California Taxpayers’ Association. “Tax and fee increases will only retard economic recovery.” 

Talk of a sales tax hike comes less than 18 months after the state cut the tax rate a quarter-cent in 2001 because it had built a huge budget surplus. 

The state had to reinstate a quarter-percent of its basic sales tax rate on Jan. 1, after reducing it for just a year. The rate automatically went down while the state’s budget surplus exceeded revenues by 3 percent but went back up amid the burgeoning deficit. 

The state imposes a basic, combined state and local sales tax of 7.25 percent on most retail transactions, such as purchases of clothing, household goods and cars. Of that, 5 percent goes to the state’s general fund, and the cities and counties divide the rest. 

Local elected officials in many counties and a few cities, with the approval of voters, have boosted the sales tax in small, varying increments to an average of about 8 percent statewide. But local officials can increase it further to a state-mandated cap of 8.75 percent in Alameda and Contra Costa counties, and to 9 percent in San Francisco and 9.25 percent in San Mateo County, because of provisions tied to earlier sales-tax augmentation measures. 

“These are dire times,” said Alameda County Board of Supervisors President Scott Haggerty. “If anything on the magnitude of what we’re going through this year continues into the next fiscal year, then I think that’s when you’re forced to have to convince the voters that you need help.” 

Representatives of the California State Association of Counties and the California League of Cities said sales tax increases would bring in much more money than increases in governments’ other limited, fund-raising options, such as user fees and service charges. 

State and local revenues stem principally from taxes, such as those on corporate and personal income and on property, over which local governments have little or no control. 

“There’s not much else,” said Jean Korinke of the League of California Cities. “It’s (sales tax) one of the few sources of revenue that they (local officials and voters) could possibly impact directly.” 

And sales taxes are a substantial source of income, providing nearly 10 percent of county tax revenue and about a third of cities’ general-purpose tax funds, according to state tax and finance agencies. If each county in the state raised its sales tax a quarter of a cent, $1.2 billion would be generated for local governments. 

But any mention of a tax increase is like a declaration of war to business and taxpayer groups, already upset by the $2 billion in tobacco tax and vehicle license fee increases that Gov. Gray Davis has proposed to help close a $23.6 billion deficit in the $98.9 billion budget for 2002-03.