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Romancing the Sales Tax: The System Is Unfair and Irrational - but There Is a Solution

By Fred Silva, senior advisor, Public Policy Institute of California
This opinion article appeared in the San Jose Mercury News on August 17, 1997

The solution to the problem of sales tax distribution can be found right here in Santa Clara County. All it takes is collaboration among the county and 15 cities.

That conclusion is consistent with the recommendations of the California Constitution Revision Commission. The commission was formed in 1994 to examine state and local government structures and propose ways to increase accountability, efficiency, and effectiveness. Among other things, it concluded that constitutional barriers to local and area-wide solutions should be removed to allow greater local collaboration to solve common problems.

The problem of sales tax distribution is one of those issues that can be solved locally - and without having to change the state Constitution. Article XIII, Section 29 of the Constitution allows - with voter approval - cities and the county to establish a new system for allocating the sales tax. Santa Clara County voters could be presented with a distribution plan that actually reflects county-wide patterns of economic activity, paying no attention to political boundaries.

Under the first proposal, the 1 percent sales tax that goes to county and city general funds would be collected county-wide. Then it would be returned to the county and cities based on population. Cities with small populations but large retail establishments would lose money, but cities with large populations would gain. Although this is the simplest approach, it would pit communities against each other, and it also fails to take into account the other pieces of the revenue pie - for example, some cities get much more money from property taxes and local fees than others.

The second proposal calls for redistributing sales taxes generated from new growth, but leaving the existing amount of the sales tax with each city or county. Each local agency would maintain its current share of the sales tax. But the amount attributed to new activity, such as new retail commercial outlets, would be redistributed. How?

One way would be to put the new money into a county-wide fund to be distributed to offset costs to cities due to land-use decisions of neighboring cities. Another possibility is to spend some of the money on county-wide infrastructure investment.

Distribution could also take into account the amount of "tax effort' the local community is putting forth to pay for local services. Thus, communities where taxes are relatively high might receive a larger share than where taxes are relatively low.

Clearly, Santa Clara County communities can figure out an allocation of the sales tax that meets their needs. All it takes is the will to do so.


California Cities and the Local Sales Tax

Deep Roots: Local Government Structure in California

Changing the Order of Things: Six Proposals for Local Finance Reform

Elements of a Framework for Collaborative Regional Decision-Making in California