Poorest Households Bear Biggest Burden of Steep Bay Area Sales Taxes

As a share of income, the poorest group of Bay Area residents pay three times more in sales tax than the wealthiest ones do.

That's according to a new study by the San Francisco Bay Area Planning and Urban Research Association (SPUR), which confirms and quantifies a position long-held by progressive advocates: that the burden of California's highest-in-the-nation sales tax falls most heavily on those with the lowest incomes.

That disparity, the report contends, makes it harder for low-income people to gain a financial foothold, exacerbating the region's already vast income divide.

"I think that the scale of the impact was surprising to me," said SPUR Policy Analyst Susannah Parsons, who wrote the report.

At 7.25%, California has the highest state sales tax rate in the country. Local sales taxes in the Bay Area can add up to 2% on top of that — and in some cases more, in cities that have received special approval from the state Legislature. As a result, a growing number of Bay Area cities have total tax rates approaching 10% on the retail sale of items like furniture, appliances, toilet paper and other household goods, as well as other common purchases, including clothing, gasoline and restaurant food. (Housing, groceries, health care and vehicle maintenance are among a long list of exemptions.)

Sales taxes have long been an essential source of funding for state and local governments nationwide. Particularly now, amid the economic fallout from the COVID-19 pandemic, cash-strapped cities and counties are increasingly dependent on revenues generated from those taxes to fund basic services. Parsons notes that SPUR, for one, has been a longtime advocate of sales tax measures to fund public transit.

"The number of sales taxes in the region continues to grow," she said. "Over the last several election cycles ... many of those measures on the ballot have been sales tax measures, not just for transit, but for child care, for road repair, for public safety. So, we're aware of the continued rise of sales taxes in the region."

But, as the report spells out, sales taxes — unlike income taxes — are considered "regressive," meaning that everyone pays the same rate at the register, regardless of their income. Cumulatively, that amount ends up being a much higher percentage of a poorer person's income than that of a wealthier person.

For instance, the report finds that Bay Area households in the lowest-fifth income tier — those making under $30,000 a year — on average pay an estimated 5.5% of their incomes in sales tax. Meanwhile, those in the highest income tier — those who make more than $163,000 — pay just 1.5% of their income in sales tax, even though they typically spend more in absolute dollars.

"The idea that folks in the Bay Area who make less than $30,000 a year are paying almost 6% percent of their total income just on sales taxes, just on toilet paper and household goods from Target or from the corner store — it was surprising to see those numbers in full light," Parsons said.

For the estimated 3.3 million households in California who live paycheck to paycheck and struggle to meet basic monthly needs like housing and child care, that disproportionate sales tax burden can be particularly detrimental, the report stresses. And in the Bay Area, like elsewhere in the state, that burden falls disproportionately on Black and Latino households, who are much more likely to have lower incomes and pay a greater share of it on sales taxes. The report notes that while white households are fairly evenly distributed among the region's five income tiers, Black households make up 31% of the lowest-income group, despite accounting for about 6% of the Bay Area's total population.

"The disproportionate impact of these sales taxes is fundamentally racialized," Parsons said. "Black households, households of color are overrepresented at the lowest end of the income spectrum here in the Bay Area. So, when we think about disproportionate impact, it's not just by income, it is certainly by race."

The SPUR report lays out several policy options to help level the playing field. The most sweeping proposal consists of a state sales tax credit that would be eligible to households with incomes under $35,000, and administered much like California's earned income tax credit. Under this system, nearly 25% of Bay Area residents would be eligible for an average annual credit of $1,048, a nearly full reimbursement of the total local sales tax burden they pay each year, the report estimates. Regionally, it would cost an estimated $669 million.

The report notes that while this would likely be the most impactful option, it would also be the hardest to implement, as the state Legislature would first have to give the California Franchise Tax Board authority to administer the credit in partnership with Bay Area governments. In the absence of statewide support, a regional tax credit system for the Bay Area is also within the realm of possibility, Parsons notes, but is even less feasible, as it would require the creation of a regional funding source and an entity to collect local taxes and distribute the credits.

Additionally, Parsons suggests that California expand its sales tax to cover largely tax-free items like most digital products and services. She notes that the amount of revenue the state raises from sales taxes has been declining because the tax system has failed to keep pace with consumption trends over the last 25 years.

"We think that that could raise additional revenue, something that the state very much needs. But it would also create some more equitable impacts as well, given that higher-income folks tend to spend more on services than lower-income folks."

A more narrow but realistic option outlined in the report is a sales tax supplement that cities or counties could oversee and offer to low-income residents, using funds set aside from any new sales taxes or increases. That, however, would only offset the burden created by any new sales tax.

Under the third and easiest proposal to implement, local governments could simply offer low-income residents a flat-dollar cash benefit to offset some of their sales tax burden.

"Say it's $250 a year. If you make less than $30,000 a year in income, you are automatically eligible to receive that amount," Parsons said.

"At the local level there will be, we expect, plenty of opportunities where local governments are going to be looking for more revenue, and they have an opportunity to make these revenue sources more equitable," she said. "Particularly now, this is a time where we need to be doubling down on the financial security of Californians."