ShareThisWhen California's voters slashed property taxes by passing Proposition 13 in 1978, cash-strapped local governments began looking for new ways to finance their operations.
City governments developed especially creative -- and sometimes too creative -- ways of generating cash, including recruiting, often with lavish subsidies, major generators of sales taxes such as big-box retailers and auto malls.
The problem with that strategy is that it was, and is, much like a dog chasing its tail, producing a flurry of activity but ultimately falling short of fulfilling city officials' hopes.
A given level of personal income and consumer confidence will generate a given amount of retail activity at any given moment. Building more stores or auto dealerships doesn't increase that activity beyond its natural level. They merely slice the retail pie ever thinner. And the pie has been shrinking for many years, thanks to changes in retail activity largely spawned by changes in demography.
As consumers age, they spend less of their incomes on taxable retail goods -- cars, clothes, appliances, furniture and the like -- and more on investments, health care and services, none of which is taxable. At one time, taxable sales in California equaled 60 percent of personal income. But in recent years, even before the current recession, they had dipped below 40 percent.
This recession may mark the historic decline of traditional brick-and-mortar retail sales, which had been force-fed in recent years by infusions of home equity loans and other debt. And shrinking sales tax revenues are symbols of that phenomenon.
Take cars, for instance. Californians once purchased more than 2 million new cars each year -- 1.8 million as recently as 2007. But that number shrank to 1.5 million last year and is expected to drop to 1.2 million this year, according to the California New Car Dealers Association, cutting local government sales taxes by more than $100 million a year.
Nearly 200 California new-car dealers have shut down in the past two years. Dozens, if not hundreds, more are on the brink. We don't even know how many U.S. automakers will survive.
The decline in car sales puts dozens of local auto malls, many of them built with city-underwritten bonds, in jeopardy. William Fulton, a California development newsletter publisher, declared in a recent Governing magazine article that "the auto mall may now be a dinosaur."
Fulton muses that the surviving dealerships will be in position to demand ever-greater subsidies from cities eager to retain or attract them.
Shrinking taxable sales also affect the deficit-ridden state budget. The budget deal approved last month raises sales taxes by one percentage point. State officials are hoping that a blue ribbon commission studying the state's tax system will recommend extension of the sale tax to services. That would relieve its reliance on declining sales of tangible and taxable goods such as cars.
(E-mail Dan Walters at dwalters(at)sacbee.com. Back columns, www.sacbee.com/walters. Distributed by Scripps Howard News Service, www.scrippsnews.com.)
ColumnMust credit Sacramento Bee
