Page 67 - FY 2020-21 Revenue Outlook

Sales Tax
Notes for the Long-Term Sales Tax Table

The table on the preceding page presents City sales tax receipts from 1956-57 through
2019-19 and estimates for 2019-20 and 2020-21.

Beginning in 2004-05, the local sales tax was temporarily reduced from 1 percent to 0.75
percent. To facilitate comparison, this table shows City sales tax receipts from 2004-05
through 2015-16 adjusted to reflect the 1 percent rate.

Each year is affected to some extent by such events as audits, tax increases known as
"base broadeners," new tax exemptions, law changes, major refunds and other
adjustments. Many factors besides the economy influence City sales tax receipts.

For most years, the effects of these adjustments, some positive and some negative,
offset one another. Thus, the percent change in sales tax receipts from year to year is a
good indication of the local economy. Highlighted are periods of revenue decline, which
are generally coincident with national recessions.

Compared to the Great Recession, the duration and depth of the 1990s Southern
California-recession was unprecedented. While the U.S. experienced a moderate
recession, the Southern California economy more closely resembled a depression. In
typical recessions, periods of declining receipts did not exceed one year, and the
revenue level prior to the recession was exceeded in the first year of recovery. But sales
tax revenue declined four years in a row in the early 1990s and did not exceed the
previous peak until nine years after the downturn began. During the six year-expansion
beginning in 1994-95, the rate of growth averaged 4.8 percent. During the recovery of
prior downturns, the rate of growth was much higher, averaging 10.4 percent and 6.6
percent for the 1970-71 and 1982-83 downturns, respectively.

The 2001-02 recession resembled that of prior years. The duration did not extend
beyond one year and sales tax revenue returned to the prior level in the following year.
Revenue growth averaged 4.9 percent until 2007-08 when sales tax growth declined
significantly. During the subsequent Great Recession from 2008-09 and 2009-10, tax
revenues declined by a cumulative 17 percent, losing a greater portion of the tax base in
two years than was lost in the four-year downturn of the early 1990s.

Receipts have been increasing since 2010-11 despite slowing growth due to shifting
consumer spending habits. Low growth in 2017-18 receipts and subsequent high growth
in 2018-19 coincides with significant statewide changes to the tax collection and
allocation system as well as receipts from new recreational cannabis business activity
and increased out-of-state remittances, now permissible per the Supreme Court's
decision in South Dakota v. Wayfair, Inc.

Sales tax estimates for 2019-20 and 2020-21 reflect growth assumed for the pandemic
and recession as provided by the City’s sales tax consultant. After the development of
these estimates, the State offered businesses the option to defer the remittance of
collected sales taxes. Because the impact of this deferral could not be accurately
quantified, the budget assumes growth between the consultant’s most-likely and
conservative scenarios.

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