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A sales tax jump could backfire

Zimmerman is a Times staff writer.

California has a reputation as a high-tax state. When it comes to sales taxes, at least, it’s well deserved.

At 7.25%, the Golden State’s statewide sales tax rate is the highest in the nation, according to a 2007 ranking. If Gov. Arnold Schwarzenegger’s proposed three-year, 1.5-percentage-point increase goes into effect, it would solidify our lead over our closest competition -- Mississippi, New Jersey, Rhode Island and Tennessee, which all had 7% statewide rates according to the most recent ranking by the Tax Foundation.

And that could take sales away from retailers as consumers look to neighboring states and the Internet to avoid paying taxes.

“The higher the sales tax is, the more likely people are to buy things out of state or online,” said Lynn Freer, president of Spidell Publishing in Anaheim, which produces information for tax professionals.

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The effect could be especially noticeable in Los Angeles, where a higher state rate -- combined with the recently passed Measure R and other local levies -- would eventually push the sales tax paid within the city to 10.25%. That would be one of the highest levies of any U.S. municipality.

“There’s something about that that double-digit rate,” said Bill Ahern of the Tax Foundation, a nonpartisan research group in Washington that leans to the conservative side on tax issues. “People who never noticed the sales tax at 7.5% or 8% suddenly will notice it when it goes to 10%.”

California is a little easier on the wallet when it comes to the total tax burden it imposes on its residents. The nation’s most populous state ranks fifth in terms of total personal taxes paid, according to the Tax Foundation, which uses a complex formula that makes allowances for such things as sales taxes paid by tourists.

The U.S. Census Bureau, which uses a much simpler calculation to determine tax burden, ranks California No. 10.

The most controversial part of the governor’s plan may be his proposal to levy a sales tax on a variety of services, including car repairs and veterinary care, that are currently untaxed. Efforts to impose such taxes have created strong backlashes in some states, notably Florida, where repeated attempts have failed.

Ahern noted that last year, Maryland lawmakers considered a full slate of new taxes, including levies on services such as tanning salons and computer repairs. All of the taxes made it into law -- except the proposed service levies, he said.

The Tax Foundation ranks California as the worst state in terms of the income tax burden on residents. The state’s top basic tax rate of 9.3%, which kicked in this year at $44,815 of income, is one of the highest in the country. And the 10% rate imposed on incomes over $1 million is the highest charged by any state, according to the foundation.

From that standpoint, it makes sense for the governor to look to sales taxes and other sources for revenue, Ahern said.

Freer said the high income tax rates create what she calls “the Tiger Woods effect,” referring to the pro golfer and former California resident who now lives in Florida, which has no state income tax.

“It’s a disincentive for wealthy people to live in California,” Freer said of the state’s income tax.

Telecommuting and online connectivity make it increasingly easy for people to pull up stakes and become tax exiles in Nevada or Arizona and maintain business ties in California, she said.

Such border-hopping -- real and virtual -- is also a problem when it comes to collecting sales tax. The state Board of Equalization, which handles sales tax collections, estimates that about $1.2 billion goes uncollected from Californians annually from Internet and catalog sales.

If an online seller doesn’t have a brick-and-mortar presence in California, it’s not required to charge sales tax. But residents who buy goods from such retailers are legally obligated to pay the tax directly to the state -- there’s a line on your state income tax form to do so. Few people do, however.

It helps state officials that California’s population centers aren’t especially close to neighboring states with lower rates, such as Oregon, which has no sales tax. That reduces the kind of phenomenon seen along the Maryland-Delaware border, where thousands of businesses have sprung up in no-tax Delaware for the shopping enjoyment of tax-averse Marylanders.

California recently made it more difficult for buyers of cars, boats or planes to avoid sales tax by buying them out of state. As of Oct. 1, those items must remain out of state at least one year to avoid California sales tax. The period previously had been as short as 90 days.

The state is in the middle of the pack when it comes to property taxes, with the average household paying $2,815 in 2005, according to the Tax Foundation’s latest report. That contrasts with an average of $6,110 in New Jersey, which had the highest per-household payment.

And drinkers and smokers have it relatively easy in California, which is probably one reason the governor’s revenue plan includes higher alcohol and excise taxes. For instance, in 2007, the state’s liquor tax ranked 34th at $3.30 a gallon and its cigarette tax of 87 cents a pack ranked 27th.

The state’s corporate taxes are stiffer. California’s tax system is among the least friendly to businesses, according to the Tax Foundation, which ranks it 40th among the states. The severance tax the state imposes on oil produced in the state -- another target of the governor’s revenue-raising plan -- is the second-highest in the nation, after Alaska’s.

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martin.zimmerman@latimes.com


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