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Saturday, November 19, 2011

Spending, recession and sales tax

The California Board of Equalization Economic Perspective report for November is on Impacts of the Recession by Income Class and Type of Purchase. The report analyzes U.S. Bureau of Labor Statistics data on spending and income. Some findings:
  • Form 2007 to 2010, spending in all income quintiles is down except for the lowest quintile where spending increased which the BOE expects is due to prices increases for rent and food.
  • As shown in Chart 3 posted here, spending on items not subject to sales tax increased while spending on non-taxable items decreased. Per BOE: "This pattern of larger declines in spending on taxable goods than nontaxable goods and services partially reflects the design of the tax system, which excludes from taxation spending on necessary items such as food for home consumption."
  • "One component of consumer spending that seemed to be relatively “recession proof,” was spending on pets, hobbies, toys, and playground equipment."

The spending patterns affect sales tax collection as recession spending affected spending on taxable and non-taxable items differently. But the greater spending on non-taxable items versus taxable ones is a longstanding trend where consumption of services and intangibles has been growing for decades which spending on goods has declined. With movement of some purchases from tangible goods to the digital equivalent (software, music and books for example), the California sales tax base erodes. See June 2011 BEA report, table 1 - here, showing that from 1959 to 2009, personal consumption spending on goods dropped 22% and spending on services increased 22%.

As I've discussed here many times, it is well past time for California to modernize its sales tax base to cover 21st century consumption. The sales tax should be expanded to personal services and digital downloads purchased by consumers (not businesses) and the rate lowered.


What do you think

1 comment:

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