NCPA - National Center for Policy Analysis


April 2, 2009

Californians will start feeling the pain of the recently negotiated state budget fix this week, when a 1-percent increase in the state sales tax will force consumers to pay more for goods such as cars, furniture, laptops and toys.  Starting Wednesday, California's sales tax rose to 6 percent, bringing the average local sales tax rate to almost 9 percent -- one of the highest in the nation, says the Associated Press (AP).

Businesses and manufacturers are worried that the temporary tax increase could prolong the worst recession in recent memory and further dampen retail sales.  In the coming months, Californians will also see an increase in personal income taxes and higher fees to license their vehicles.

  • Gov. Arnold Schwarzenegger and lawmakers agreed to $12.5 billion in tax increases as part of a $42 billion deficit-closing plan to help stave off what they described as devastating cuts to education and health care; despite the higher taxes, state programs also face major cutbacks, and the state is struggling with double-digit unemployment.
  • The sales tax is expected to bring in an estimated $5.8 billion before it expires on July 1, 2011, but could last another year if voters agree to extend it as part of a package of budget-related initiatives in a May 19 special election.
  • State officials predict consumers will spend less because of the tax, and included a 1 percent reduction in their revenue calculation.
  • Besides a higher sales tax, the state will impose a.25 percent increase in the personal income tax rate in the 2009 and 2010 tax years and a.5 percent increase in fees to license vehicles from this May to July 1, 2011.
  • A fourth tax increase reduces the dependent care credit parents and caregivers can claim to $99 from $309 for the 2009 and 2010 tax years.

According to the Tax Foundation, an independent Washington, D.C.-based nonprofit that educates the public about taxes, the median national rate of state and local government sales taxes was 5.5 percent at the beginning of 2009.  The last time consumers across the state saw an overall rate increase was 2002.

Steve Levy, director and senior economist of the Center for the Continuing Study of the California Economy, described the package of higher taxes as a shift in wealth from the private sector to the public sector.  Taxable sales make up about $600 billion of the state's $1.7 trillion economy.

Source: Judy Lin, "California sales tax rises to almost 9 percent," Associated Press/AOL Money & Finance, April 1, 2009.


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