California Tax Cut Bill Would Fight Inflation, Boost Economy

An employee takes money from a customer at the cash register at a Best Buy store on Nov. 22, 2005 in San Francisco, Calif. Justin Sullivan/Getty Images

Commentary

Now we’re getting someplace. Rookie Assemblywoman Kate Sanchez (R-Murrieta) is advancing Assembly Bill 1724, which would cut the state sales tax 1 percentage point for one year. I’ve long said the way to improve the economy in California is with a series of small tax cuts for the middle-class and poor. Start small, keep trying.

It would cut the current state sales tax of 7.25 percent to 6.25 percent. (The sales tax is split with local governments. AB 1724 specifies only the state portion is cut, from 4.75 percent to 3.75 percent. Cities and counties also can add their own extra sales taxes.)

This is a bill both parties should be able to support. I interviewed Sanchez about the legislation.

Q: Why is this needed?

Sanchez: “Rising inflation and higher prices are affecting us all, but especially low-income Californians. AB 1724 will offer immediate financial relief for everyone. The temporary 1 percentage-point reduction in the state sales tax will allow hard-working Californians to keep more money in their pockets and let them decide how they would like to spend it. This is a sensible solution that will help all who have been hit by the rising costs in our state.”

Q: Will it help middle-class and poor Californians more than the rich?

Sanchez: “California’s sales tax is a flat, regressive tax. That means it impacts lower-income Californians more than others because it takes up a larger share of their total income. Providing a reasonable 1 percentage-point reduction of the state sales tax for one year will offer all Californians immediate relief from the state’s increasing cost of living. But it will especially benefit working class Californians who have spent the past several years foregoing necessary purchases and taking on unfortunate levels of debt.”

Q: Will it add to the expected coming budget deficit?

Sanchez: “Sacramento does not have a revenue problem, it has a spending problem. Last year we had a nearly $100 billion surplus, much of which Sacramento Democrats chose not to save for a rainy day. They spent over $20 billion on homelessness over the past few years, and the homeless crisis has only gotten worse. We have wasted billions on the high-speed rail that was supposed to be finished in 2020, and the state won’t even have a line open from Merced to Bakersfield until after 2030.

“These massive government boondoggles and inefficiencies all are happening while working-class Californians are paying the highest taxes in the nation and struggling to get by.

“I introduced AB 1724 to provide immediate inflationary relief to the Californians who need it most. We can afford to provide this relief and balance our budget by cutting red tape and making wasteful programs more efficient.”

Q: What are your Democratic colleagues saying about it?

Sanchez: “The bill is up for a hearing on April 17th in the Assembly Revenue and Taxation Committee. I’m willing to work with anyone across the aisle to help provide immediate relief to Californians and have urged my colleagues to support the bill.”

Q: Will it help Californians stay here, instead of leaving for other states?

Sanchez: “It is my hope that AB 1724 will help make California more affordable for our working and middle-class residents. One of the biggest reasons so many Californians have been forced to leave the state is just how unaffordable everything has become. Sacramento politicians need to get serious about lowering the cost of living for Californians, and I believe AB 1724 is a good step in the right direction.

“If you want to keep more of your hard-earned tax money, please call your legislative representative and ask them to support AB 1724.”

Conclusion

Let me just add a couple of things. Although this would cut the sales tax, in the long run it might actually increase state revenues. That’s because, first, it would send a strong signal: Instead of increasing taxes once again, this time California actually is going to cut taxes.

Second, the sales tax reduction would encourage people to purchase more things, increasing the overall tax base. Thinking about buying a new, $2,000, 75-inch TV screen before the Dodgers defeat the Yankees in the World Series? This tax cut will save you $20. But the 6.25 percent tax would bring in revenues of $125 to the state it otherwise would not have received at all. Consumers really do think this way—what economists call acting “on the margin.”

The impact would be even greater for cars. A $40,000 car purchase would save the consumer $400. But if that’s enough to entice a purchase, the state would get $2,500 it otherwise never would have seen.

Finally, it also would help to cut taxes on the “rich,” especially the stultifying 13.3 percent top income tax rate. Doing so would encourage the rich to stay here and invest in new businesses and jobs. But that’s not possible for now. You take what you can. If AB 1724 passes, the next step would be to extend it through 2025—and beyond.

Let’s hope Democrats join with Republicans in helping the poor and the middle class cope with inflation.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.