Page 60 - FY 2021--22 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
2019-20 and estimates for 2020-21 and 2021-22.

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, allocation
calculation changes, 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 first
year of recovery exceeded the revenue level prior to the recession. In the early 1990s,
however, sales tax revenue declined four years in a row and did not exceed the previous
peak until nine years after the downturn began. During the seven 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 a trend towards lower 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, new receipts from legalized recreational cannabis business
activity and increased out-of-state remittances resulting from the Supreme Court's
Wayfair decision.

Actual and estimated tax receipts for 2019-20 and 2020-21 reflect the outsized impact to
the local economy from the pandemic-driven business closures, the resulting drop in
employment and spending, and the State’s efforts to provide tax relief through extended
tax filing due dates. The 2021-22 estimate reflects higher growth as receipts recover
from the pandemic restrictions and recession, which assume the return of indoor
business operations, a decline in unemployment, and low inflation.

51