Sales Tax Revenue Plummets

When the economic news every day is bad, people do what comes naturally - they sit on their money:

State and local sales-tax revenue fell more sharply in the fourth quarter of 2008 than at any time in the past half century, and has continued to erode through the beginning of 2009, according to a report released Tuesday.

The report by the Nelson A. Rockefeller Institute of Government at the State University of New York underscores how swiftly the consumer slowdown has eaten into municipal budgets. The drop in tax revenue has forced cities and towns of all sizes to cut everything from police to summer pool hours, and has sent legislatures scrambling for federal economic-stimulus funds to help ease budget gaps.

"The sales tax has been absolutely hammered," said Don Boyd, senior fellow at the institute.

State and local sales taxes, among the largest sources of revenue for municipalities, fell 6.1% in the fourth quarter of last year, as consumers bought fewer clothes, ate out less and canceled vacations. Revenue from personal income taxes was down 1.1% in the fourth quarter; corporate income taxes dropped 15.5%, reflecting weaker profits.

The declines have continued through the beginning of this year. In the first two months of 2009, the 41 states that have reported tax revenue saw total receipts decline 12.8%, versus the same period a year ago.

What I'm interested in are the California numbers after April 1st. That day the sales tax rates in California went up a full percentage point. We're now paying 8.75% in Orange County, and in Los Angeles County they'll soon be paying 10.25%.

Of course, the expectation is that sales tax revenue will go up. I don't think the increase, if any, will be anything like what the Governator and the legislature had planned. People are trying to find other ways to get big ticket items - either by purchasing them out-of-state or online through websites based outside of California. Though the State will try to collect taxes anyway, what they don't know won't hurt consumers and enforcing California taxes on those purchases will be nearly impossible.

This rate increase will no do what the politicians thought it would do.