On the Spatial Equity of the California Sales Tax: Estimates of Imbalances in Tax Dollar Flows

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The passage of the California Property Tax Limitation Amendment (1978), by increasing the relative importance of the state sales tax as a source of government revenues, increases the concern over the spatial equity of this tax. Since the state apportions part of the revenues of the tax to the counties on the basis of gross taxable sales by county, inequities in applying the tax are possible. Such inequities arise because households may purchase taxable items outside their county of residence, leading to tax dollar flow imbalances, while the local public goods financed by the tax revenues are not solely consumed in the county of residence. In this paper, estimates of tax dollar flow imbalances are obtained by spatial disaggregation of total taxable sales by county, using a spatial interaction model in relation to county income data adjusted for spatial variations in housing cost. Maximum likelihood estimation indicates the existence of statistically significant spatial effects, and although the estimated imbalances were found to be relatively small for most counties, five counties were each estimated to have net imbalances exceeding half a million dollars in 1970. Gains and losses exceeding one million dollars were estimated to occur in some counties in the San Francisco and Los Angeles areas.