Bay Area transit measure will test voters’ taste for higher sales taxes

The three largest sources of revenue for California governments are taxes on personal income, real estate and retail sales — and increasing them ranges from difficult to bordering on impossible.

Raising income tax rates requires legislative approval by two-thirds voting majorities or voter approval via ballot measure. After winning a second stint as governor in 2010, Jerry Brown persuaded voters to temporarily increase taxes on high-income Californians (and a token increase in the sales tax) to close a budget deficit.

A ballot measure in 2016 extended that income surtax to 2030. It’s likely public employee unions and their allies will seek another extension via ballot measure in 2028.

Property tax rates are frozen by the state constitution, thanks to passage of Proposition 13 in 1978, and efforts to repeal or modify property tax limits have failed at the polls.

That leaves sales taxes, divvied up among state and local governments, as the state’s most flexible levy.

The current basic rate is 7.25% on taxable goods, and that’s what it is in some rural counties. State law limits any additional tax on sales to 2 percentage points, so theoretically the highest legal rate including local, voter-approved increases, is 9.25%.

However, actual sales tax rates range as high as 10.75% because local officials routinely ask the Legislature to exceed the 2% cap, and the requests are virtually certain to be granted.

This month Gov. Gavin Newsom signed bills granting three jurisdictions permission to exceed the cap, including a 1% increase in San Luis Obispo County and a 0.25% boost for the Monterey-Salinas Transit District.

The third and most important would be a 0.5% hike in Alameda, Santa Clara, San Mateo and Contra Costa counties, plus 1% in the City and County of San Francisco, all to prop up Bay Area Rapid Transit and other transit services in the San Francisco Bay Area.

The Bay Area measure, Senate Bill 63, would maintain the new levies — estimated to raise just over $1 billion a year — for 14 years if approved by voters. It results from several years of effort by the region’s political and civic leaders to shore up transit systems, which saw ridership and farebox revenues plunge during the COVID-19 pandemic.

How the issue will be presented to Bay Area voters is uncertain. Under current law, were the newly formed Transportation Revenue Measure District to place the tax hike on next year’s ballot, it would require approval by two-thirds of those voting, which could be difficult to muster.

However the state Supreme Court has declared, albeit indirectly, that tax increases placed on the ballot via initiative petition require only a simple majority for approval, and many of the local surtaxes in recent years have been enacted via initiative to take advantage of that dictum.

Last year, the court invalidated a ballot measure that would have reversed the policy on tax votes. Anti-tax groups such as the Howard Jarvis Taxpayers Association are planning another such measure for 2026.

Backers of the Bay Area transit tax hike are apparently prepared to use the initiative process if polling indicates it’s the only pathway to enactment. Were it to pass, sales taxes would top 11% in some cities and counties, close to the nation’s highest retail sales levies.

The Tax Foundation, a Washington, DC-based organization that tracks tax policy, says that Louisiana, at 10.11%, has the highest average sales tax of any state. It calculates California’s average to be 8.98%, the nation’s seventh highest.

So, one might wonder, at what point does a high sales tax rate become a factor in consumer decisions? Some Bay Area cities and counties will be testing that out if the proposed transit tax is imposed.