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California Sales Tax Revenue Decreasing


 Farrah Fawcett was popular in 1979.

Californians are spending less on taxable goods and more on nontaxable services. So says a report recently released by the Legislative Analyst's Office, "California's Nonpartisan Fiscal and Policy Advisor." That means California is facing declining sales tax revenue.

Consumer spending on taxable goods peaked in California in 1979. Since then, Californians have been spending less on tangible goods subject to sales tax. The report explains that change in consumer spending--why it happened and the effect it has had on sales tax revenues.

Snapshot

  • Taxable sales have grown 1.4% slower than the state's economy, annually, since 1979.
  • Californians used to spend 53 cents per dollar on taxable items. They now spend 33 cents.
  • The cost of services has grown 4x more than the cost of goods since 1980.

California depends on sales tax revenue; it is the second largest source of revenue for the state. If sales tax revenue has not plummeted with the decline in spending, it's because the rate of sales tax has increased significantly. The average combined state and local rate is currently 8.4%. According to the report, had the cost and sales of taxable goods kept pace with the cost and sales of nontaxable services, the rate could be much lower--5.2%.

The Legislative Analyst's Office predicts this trend will continue: "In general, we expect increases in service prices will continue to outpace increases in goods prices… over the next ten years. Taxable sales are therefore likely to make up a declining portion of the state's economy over the next decade."

Meaning?

"Absent further increases in the sales tax rate or expansion of its base, sales tax revenue for the state and local governments are likely to grow slower than the economy for at least the near future."

California is not the only state to notice a shift away from spending on taxable goods. Indeed, more than one state is considering broadening the sales tax base to include services. Some have already done so: Massachusetts now taxes certain computer and software services; Minnesota now taxes several previously untaxed services; and Vermont and New Jersey tax cloud computing services.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.