California Local Option Sales Taxes for Transportation During the Pandemic

Abstract

Local option sales taxes (LOSTs) approved by voters have emerged over the past several decades as a method of funding transportation projects. LOSTs have been especially popular in California, where many counties rely on them to fund a large share of street, highway, public transit, and other transportation projects, as the buying power of federal fuel taxes and some other transportation revenues has waned. These voter-approved tax measures generally outline specific projects to be funded, but if these projects exceed their projected costs or if tax collections fall below predicted levels, some of these projects may be delayed or canceled. LOSTs thus inherently come with a degree of uncertainty tied to broader economic forces, including the supply of and demand for taxable goods and services.

The COVID-19 pandemic in California provides a vivid and timely example of the link between sales tax revenues and characteristics of regional economies. Thi study identifies factors associated with LOST revenue generation during the pandemic. We find that LOST revenues fell sharply, but recovered quickly statewide. Wealthier counties tended to recover LOST revenues more slowly than poorer counties.

About the Project

The COVID-19 pandemic dramatically affected transportation systems, including the ability of localities to pay for them. This project explores the effects of the pandemic and the associated economic turbulence on local option sales taxes (LOSTs), an increasingly common revenue source for transportation in California and across the U.S. During times of economic weakness, spending and therefore LOST revenues will lag—the pattern in California counties during the initial months of the pandemic. Fortunately for local transportation budgets, LOST revenues recovered after the initial economic shock of COVID-19, albeit at a lower level than they likely would have otherwise. LOST revenue trends during the pandemic were affected by national and regional economic conditions and government policy as well. This public health crisis illustrates both the pitfalls and resilience of LOSTs during economic downturns and recoveries.