Turns Out We Don’t Tax Everything

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Making changes in California's taxation system is tantamount to a 90 pound weakling bench pressing half a ton.  Just as the physical laws of nature prevent the latter, the pressures of interest group politics in California inhibit the former.

Given such constraints, it's easy to see why almost any proposal to alter California's revenue structure would almost immediately hit a huge political wall of resistance. Still, every once in a while a new idea merits some thought, if nothing else.

The days of cutting and cutting alone are over. If California is to provide basic services and be modestly competitive, we will have to find revenue somewhere. Expanding the sales tax base won't solve all of our problems, but it may well become part of the solution if legislators and the governor are willing to stop shielding services and beginning protecting the public good.

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Looking at the sales tax is one place to start. Revenues from the sales tax have fallen considerably over the past quarter century, while dependence upon the the personal income tax has skyrocketed. In 1985, each of these taxes amounted to 35 percent of the state's revenues. Today income taxes amount to 56 percent of the state's take, while sales taxes have shrunk to 26 percent. This lopsided arrangement is most problematic when the economy suffers recession. During such periods, like the one we are going through now, income taxes fall precipitously with people out of work. Sales taxes fall, too, but not to the same degree.

But the big problem with sales taxes is the extent to which this revenue tool is limited in application. In fact, sales taxes in California are levied on only about 40 percent of the areas where they are commonly applied in other states. One recent study by the California
Board of Equalization finds that application of the sales taxes to a few basic and currently untaxed services would bring in over $2 billion annually. They include auto repairs and services ($1 billion), amusements and gambling ($650 million) sports and movie
tickets ($258 million) dry cleaning and laundry ($187 million), and car washes ($39 million).

Left out are the billions more that could be collected from taxation on services by physicians, lawyers, accountants, electricians and plumbers, not to mention the $1-2 billion that could be captured by applying sales taxes to on line purchases. Add it all up and
California could bring in another $4 to $5 billion annually without increasing any tax rates.

Perhaps some of these categories should be left out, maybe others not mentioned should be included. Either way, it seems that these service areas--long protected by interest groups--are long overdue for a close look.

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