Last week I posted a link to a calculator at the Sacramento Bee website where you can calculate an estimate of how much more you will have to pay as a result of the tax increases signed by the Governor.
http://www.sacbee.com/1098/story/1627728.html
A reader alerted me to some possible flaws with the calculator so I asked our chief economist at the Board to look at the calculator’s sales tax component. The conclusion is the calculator is off in two ways with respect to sales tax, the net result is it likely understates the impact on individuals. I do not believe the flaws are intentional but based on an imperfect understanding of California’s economy. I very much appreciate the Sac Bee’s efforts to make clear the impact of the tax for individual Californians and I encourage them to continue doing so. The analysis of their calculator is below.
“We now know the calculator does not factor in higher income tax because it did not include an analysis of the Federal stimulus conditions. On Thursday it was reported the Federal stimulus money will fall $2 billion short of the $10 billion needed to stop $1.8 billion in higher income taxes for all Californians.”
The calculator’s assumptions on sales taxes are wrong in both directions. The methodology used in the Sacramento Bee tax calculator understates the impact of the sales and use tax (SUT) increase in one way and overstates it in another. The methodology the calculator uses is as follows: the reporter (whom I spoke with last week) used a figure from the California Statistical Abstract that indicates that California “general sales taxes” for state and local government combined were $19.45 per $1,000 of personal income. He then multiplied the $19.45 by a growth factor to reflect what the sales taxes per $1,000 of personal income would be after the enacted sales tax increase took effect. His calculation is that, after the tax increase is applied, the sales tax burden would rise to $22.13 per $1,000 of personal income.
The case for understatement. The reporter actually adjusted the published California Statistical Abstract number (which was $29.93 per $1,000 of personal income) to reflect the fact that not all SUT is paid by consumers. However, he assumed that consumers pay 65 percent of the total (and business pays the other 35 percent on the items that they themselves consume). This is how you get from the $29.93 number that DOF reports in the California Statistical Abstract to the $19.45 number used in the Sacramento Bee calculator. While there is no good data on the split between the shares of the sales tax that consumers and businesses pay, I have generally seen the number closer to 70 percent. This would suggest that the impact of the sales and use tax increase as determined by the calculator understates the true impact.
The case for overstatement. Using the reporter’s approach, the growth factor he used actually overstates the effect of the sales tax increase (before adjusting the 2005-06 data to the present day). Specifically, the reporter grew the $19.45 figure by 13.8 percent. His logic was that this was the percentage change in the sales and use (SUT) tax rate after the tax increase was enacted. However, he used the wrong numbers in the percent change calculation. His 13.8 percent calculation comes from assuming that the rate rose from 7.25 percent to 8.25 percent. In other words, the reported calculated the percentage change on the SUT rate using the base rate only (not the optional local SUT rates); We estimate that the average statewide SUT rate will rise from 7.96 percent to 8.96 percent. This translates to a percentage increase of 12.6 percent, which would raise the tax burden to $21.89 per $1,000 of personal income, rather than $22.13.
Additional Understatement: What about Adjusting 2005-06 Data to the Present Day? As you know, the calculation of SUT taxes per $1,000 of personal income is what drives the calculator’s impact of the SUT rate’s increase. However, as you have noted, the initial data is from 2005-06; this is the most recent year that Census has published. Two factors will impact that calculation when it is performed for subsequent years. First, as you noted, price increases lead to a higher collected amount of SUT revenues. Also, the growth of personal income plays a role. Generally speaking, years with small growth in personal income will see a higher calculation, as noted below:
Census calculations of California’s Sales and Use Tax Burden Per $1,000 of Personal Income
1991-92 $31.41
1996-97 $29.68
2001-02 $27.56
2003-04 $29.17
2004-05 $29.73
2005-06 $29.93