The WSJ profiled how sales tax revenue has dropped significantly across the country but they missed a big factor… new vehicle purchases.
State and local sales taxes, among the largest sources of revenue for municipalities, fell 6.1% in the fourth quarter of last year, as consumers bought fewer clothes, ate out less and canceled vacations. Revenue from personal income taxes was down 1.1% in the fourth quarter; corporate income taxes dropped 15.5%, reflecting weaker profits.
Here in California the response from Sacramento to declining tax revenue has been to increase taxes, with the attendant result being that consumers are purchasing even less. Case in point, I wanted to buy a new car but when I looked at the increase in sales tax, which would go up by approximately $800 for the vehicle I was considering, and the DMV registration fees I decided to scrub it. Why should I give the State of California another $800 when my marginal personal income tax rate has gone up and additional fees have been attached to practically everything that can be taxed (e.g. look at your cell phone bill lately)?
When everything you purchase has an additional 10% tacked on to the purchase price by the state, the result is that merchants and manufacturers reduce prices or consumers purchase less.
Every dollar that is spent by government is taxed or borrowed out of the economy and sales taxes offer an excellent test bed to see this in real time. As I look at the Tea Party Movement sweeping 300 cities today I am struck by fragile the relationship between government and populace really is and protest can come in many forms but the most destructive to government is simply to have consumers boycott spending beyond the basics.