Local governments want to trash state’s cap on sales tax rates 

State lawmakers are thinking about increasing California’s cost of living by authorizing higher local sales tax rates.  

The sales tax is the most noticeable and easy-to-understand tax for consumers, but it inflicts major costs on Californians and their employers. The tax is regressive, taking the heaviest financial toll (as a percentage of income) on those least able to pay. 

Sales tax dramatically increases the cost of everyday necessities – and since inflation has increased the prices of just about everything, the tax on those prices has increased accordingly. 

This is exactly why, many years ago, the state placed a 2 percent cap on local sales taxes. 

California began imposing sales tax in 1933 at a 2.5 percent rate, and within a few years, hundreds of cities were imposing their own “transactions and use taxes” at various additional rates. Taxpayers weren’t happy about the hit on their budgets, and retailers complained about the difficulty of keeping up with tax requirements.

As a solution, legislators placed a 2 percent cap on the total local transactions and use tax rate. They also placed one state agency in charge of administering the tax for the state and local governments alike, and required local governments to use the same exemptions as the state. 

This arrangement has worked for decades, even with the statewide rate climbing to the highest in the nation, at 7.25 percent.

In recent years, however, the Legislature dramatically reduced the effectiveness of the local cap by granting exceptions. While the maximum sales tax rate anywhere in California should be 9.25 percent, it is up to 10.75 percent in several areas of the state.

Now, lawmakers are planning to allow even more areas – including Los Angeles County, home to one-fourth of the state’s population – to exceed the 2 percent cap, paving the way for a higher cost of living if voters approve new tax increases. 

The bills and areas targeted for higher taxes are AB 1256, Humboldt County; AB 1385, Riverside County (the county already is authorized to exceed the cap, but this bill would increase the maximum tax the Riverside Transportation Commission could charge); AB 1679, Los Angeles County; SB 335, Santa Clara County; and SB 862, Santa Cruz County (for its Metropolitan Transit District). 

The California Taxpayers Association is leading a large coalition in opposition, reminding lawmakers that the tax hikes would cause job losses and economic damage when the state desperately needs a thriving economy to generate revenue.

Taxes influence behavior. For example, manufacturing and research-and-development industries face a significant sales tax burden in California, which is why we lose prominent companies to other states. Under existing law, when a business purchases manufacturing or R&D equipment, the purchase is subject to a one-time local sales tax of 1.25 percent plus any additional voter-approved transactions and use taxes. Authorizing more counties to exceed the 2 percent cap would increase the cost of doing business for critical industries – including Santa Clara County’s semiconductor manufacturing industry and Los Angeles County’s film and television industry.

“While many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts,” the Washington, D.C.-based Tax Foundation noted in a February 2023 report. 

The tax hikes also would increase government costs. Unlike the federal government, which is exempt from sales tax, municipal and state agencies are subject to the tax. Local sales tax hikes increase the taxpayers’ costs for purchases made by cities, counties, public school districts, and universities. 

Let your representatives in the Legislature know that your cost of living is high enough already, and they shouldn’t poke more holes in the protection that taxpayers have against exorbitant sales tax rates.

Joan Armenta-Roberts is a sales tax consultant with the California Taxpayers Association, with more than 25 years of sales tax experience, both in the private sector and with the state agency that administers the tax.

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