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Institute on Taxation & Economic Policy

The inequity of high sales tax rates

According to the latest reports by the California Dept. of Fee and Tax Administration, in 2020 Marin County businesses and residents paid almost 450 million dollars in sales taxes. On average, that’s over 1,700 dollars per person or 4,200 per household.

Anyone think they paid that much last year? As the sales tax is only on taxable items, how could the amount be so large per person or household?

Of course, you don’t think you’ve paid that much, because much of the sales taxes that you pay are indirect. They’re the sales taxes businesses pay and are hidden in the prices of all goods and services.

Sales taxes are ubiquitous. All but five states use them to fund state and local governments. While there are differences among the states as to rates and what items are tax exempt, within Marin the difference between the highest and lowest sales tax rate is pretty small. The highest rate is San Rafael at 9.25% while the county and many cities share the lowest rate of 8.25%.

As a consumer, how much you pay directly in sales taxes is dependent on your overall income and spending patterns, whether you’ve purchased taxable goods in other counties, and whether you’ve bought an expensive taxable item (e.g., a car or appliance). You see this amount specified on receipts even when buying taxable goods online. And the amount you see isn’t close to what you ultimately pay.

Consumers aren’t the only ones paying sales taxes. Businesses do too when they buy taxable items. And much of what they pay is part of the cost of doing business, like labor or rent or phone service. Businesses pass these costs onto consumers through pretax retail prices, even on non-taxable items and services.

sales_taxes_NY_ITEP_whopays.png#asset:19179According to the liberal think tank, the Institute on Taxation and Economic Policy (ITEP),

“these business-input sales taxes add to the cost of producing goods and services, and are therefore mostly passed forward to consumers in the form of higher retail prices.”

What you don’t see is the amount of tax buried in the pretax price of all goods and services. On taxable items you’re actually paying the tax twice because part of the pretax price includes costs of hidden sales taxes.

For instance, consider what happens when you buy an orange at the local market. Food is tax exempt. Your local market isn’t. There is no sales tax for the orange on your receipt. However, the market has paid sales taxes on the taxable goods needed to manage its offices and stores. It’s part of the cost of doing business and much of that cost is passed along in the pretax retail price, even when the item – like the orange – is tax exempt.

Another example is when you go to the dentist. Services are exempt from the sales tax. But your dentist has paid sales taxes on equipment needed to run the office and it isn’t cheap. It’s the cost of doing business for the dentist and you can be assured that this cost is incorporated in the how the dentist prices his or her services.

This means that much of the sales tax is hidden from consumers as well as from businesses. In fact, the full cost buried in the price of any purchase can only be known by estimating how different businesses absorb extra costs in the goods and services they purchase. The ITEP thinks “most” of the cost is buried in retail prices.

What’s even more damning?

Sales taxes are the most regressive tax there is that is commonly used to fund local governments. Why is that? Less affluent households save a lot less of their income than more affluent households do. They have less income and so purchase fewer goods and services, but spend more as a proportion of their income. As a consequence, less affluent households pay more tax as a proportion of their income than wealthy households do.

And what should bother us even more?

As everyone knows, the economy is not producing equitable results and this bothers many of us. Liberal voters regularly decry the unfairness of our economy and support many programs that help the less affluent. Yet, as soon as a sales tax is proposed for a cherished purpose, the inequities and burdens of the tax on the less affluent are ignored.

The City of San Rafael recently easily passed a sales tax increase. The County will likely easily pass an extension to Measure A, which funds open space. Anyone else see the contraction here?

In 2020, there were 130 sales tax measures on local ballots in the state. Over three-quarters of them were approved by voters who can’t know how much the tax increase will cost them, because much of the cost is hidden and because they ignore the unfairness of the tax.

Arnold is a PhD economist, currently lecturing at the Fromm Institute (USF) and in the Osher Life Long Learning Institute (OLLI) at Dominican University and Sonoma State University.