Will Sales Tax Increases Benefit L.A. in the Long Run?

PHOTO: The Los Angeles City Council wants to raise sales taxes by half-cent. The total sales tax would reach 9.25 percent -- among the nations highest.Dan4th/flickr
Los Angeles officials want to raise the sales tax rate by a half-cent. The total sales tax would reach 9.25 percent -- among the nation's highest.

Los Angeles officials want to raise the city's sales tax a half-cent to help with current and future budget shortfalls. The increase would bring the sales tax rate in the city to 9.25 percent, among the highest in the nation.

The proposed tax is expected to generate about $220 million per year and would cover next year's projected shortfall of $216 million, as well as a $317 million gap the following year.

But experts warn that any gains in revenue would be short lived.

"I think it's a pretty bad idea," said William Yu, economist at University of California Los Angeles. "In the short run, indeed you will have higher sales tax revenue. However, we need to know that the people will notice and move to an area with a lower tax rate or go shopping and do business there."

Yu points to neighboring Inglewood and South Gate as examples. Both cities raised sales tax a half-cent to generate more revenue, but have experienced a drop in sales that erased virtually all gains, he said.

After Inglewood increased its sales tax in 2007, it saw sales tax revenue surge 55 percent. But as conscious consumers changed their habits, the city's gains dropped 15 percent in the first year, 22 percent in the second and 37 percent by the third, adjusting the numbers to account for the recession.

"When you raise the rate, the quantity [of sales] may be gone and you collapse the tax revenue," Yu said.

Higher sales tax or not, all three cities saw their sales tax revenues decline during the recession. Comparing sales tax revenues in 2006 and 2011, Yu found that Los Angeles saw a drop in 8 percent. Inglewood and South Gate, whose sales tax increases were meant to bring the cities greater revenues, saw their incomes drop by 6 and 7 percent respectively.

"So if you look at this data, you'd think the sales tax rate didn't change [for Inglewood and South Gate]." said Yu. "But actually they did, they raised the sales tax. And the results were similar."

Instead of an across-the-board increase, Yu suggested Los Angeles implement a tax that would raise revenues and address long-term costs – like a soda tax.

"We don't care about this kind of business moving out of our city because they're actually not good for our city," he explained.

In the recent election, El Monte, a city a few miles east of Los Angeles with one of the highest rates of childhood obesity in the country, tried unsuccessfully to do just that. Facing the prospect of insolvency, the mayor asked voters to approve taxing soda one cent per ounce. But the measure was defeated amid heavy lobbying by the beverage industry.