Sales Tax

Reads at about grade 5Both sides shown7 sources cited

A sales tax is a small charge added to the price of things you buy. The store collects it and sends it to the government.

What it is

A sales tax is a tax on what people buy: when you buy something, a few extra cents per dollar get added at the register, and the store collects that money and sends it to the government. In California, the tax mostly applies to physical goods, like clothes or a phone, and not to most services or digital goods. The rate isn't the same everywhere -- it depends on your city and county, and the state's average rate is about 8.5 percent. The sales tax is one of California's biggest sources of money, helping pay for schools, colleges, health programs, and public safety. Economists broadly agree on two facts. First, the sales tax is regressive, meaning it takes a bigger share from people who earn less: lower-income families spend almost all they earn, while richer families save more of theirs, so the poor end up taxed on nearly every dollar and the rich only on part of theirs. Second, a sales tax falls on spending, not saving, so it doesn't tax money that people save or invest -- many economists see this as efficient. What people fight over is what to do about this. One side says a broad, simple sales tax is a fair and efficient way to fund government, and that any harm to the poor is best fixed with targeted help. The other side says the tax squeezes struggling families too hard, and wants government to rely more on taxes tied to income and wealth.

How it works

California's sales tax is really several taxes stacked together: about half of the rate goes to the state's General Fund, which pays for many state programs, and a 1 percent slice, called the Bradley-Burns rate, goes to cities and counties. The rate isn't the same everywhere -- it varies across cities and counties, from about 7.5 to 10 percent, because of local add-ons. Some things are left out on purpose -- California doesn't tax food you buy to cook at home, which helps ease the cost of basics. People debate the sales tax because it forces a trade-off between two goals: efficiency and fairness. A tax on spending leaves savings and investment untaxed, which many economists like, but poorer families spend a larger share of their income, so the same tax takes a bigger bite out of their budgets. So part of the fight is about values -- how much fairness should we trade for efficiency? -- and part is about facts, like whether one year of income is really the best way to measure who bears the load.

The debate — equal weight, both sides

The case for broad-based sales taxes

Cross-cutting. Made most often by pro-growth and free-market tax groups, like the Tax Foundation and Cato. But the case for taxing spending is also mainstream among economists across parties.

Supporters say a sales tax is one of the smartest, fairest ways to fund government, because it taxes what you spend, not what you earn or save. As the Tax Foundation notes, sales taxes "only fall on present consumption," so they don't punish people for saving or investing -- and since savings help fund new businesses and jobs, many economists say a tax on spending is better for growth than an income tax. Cato Institute scholars say this kind of tax "avoids the double tax and the saving penalty because the saver is not taxed on the amount that is saved." Supporters also value simplicity: the ideal is a broad base with a low rate, meaning most goods and services get taxed, which "allows more revenue to be raised at lower rates." The money is also steadier than income-tax money, which rises and falls sharply with the economy -- as the Tax Foundation puts it, "consumption is a more stable tax base than income." And the poor? Supporters say the honest fix is targeted help rather than carving breaks into the tax itself. They note that broad grocery breaks mostly reward middle- and upper-income shoppers, who buy pricier food -- the Tax Foundation calls a grocery break "a middle-income, not a low-income, benefit," adding that those families "can be more efficiently made whole through grocery tax credits," meaning money paid back to offset the tax.

The case against relying on sales taxes

Cross-cutting. Made most often by anti-poverty and progressive tax analysts, like ITEP and CBPP. But the worry that sales taxes hit the poor hardest is widely shared, including by many conservatives.

Critics say the sales tax takes the biggest share of income from the poor -- that's what regressive means. As ITEP explains, sales taxes are "inherently regressive because the lower a family's income, the more of its income the family must spend on things subject to the tax." The gap is wide: ITEP finds low-income families "spend three quarters of their income on things subject to sales tax," middle families spend about half, and the richest spend "only about a sixth." So a tax that looks flat lands unequally. ITEP figures that a 6 percent sales tax works like an income tax "with a 4.5 percent rate for the poor," "a 3 percent rate on the middle-class," and "a one percent income tax rate for the rich." A parent buying diapers pays the same rate as a rich shopper buying a big TV, but it costs the parent far more of what little they have. Critics say a fair system should lean more on taxes tied to income and wealth, since those rise with ability to pay. Where a sales tax stays, they want to soften it -- one option is to exempt basics like groceries, but a better one, they say, is "targeted and refundable low-income tax credits": payments the government sends back to low-income families to offset the sales tax they paid. The aim is a tax system that helps close the gap between rich and poor, not widen it.

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