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Transportation Funding & Financing

Local Option Sales Taxes

A significant and increasingly popular revenue source for surface transportation is the local option sales tax. Many states authorize localities to levy local option sales taxes, and many have chosen to do so for transportation purposes to fill gaps in or leverage available state revenue. Often, the use of a local option sales tax requires a voter referendum. Spending authority varies from state to state, some granting localities the choice of earmarking funding or using it as general revenue. Other states require a specific purpose be attached to the tax, but define it broadly, such as road improvements. The most restrictive requirements involve a legally-binding expenditure plan, earmarking the tax revenue to a list of specific projects. Local options sales taxes have been especially important in funding rail transit projects.

The following research findings published recently in Transportation Quarterly provide insight into local option sales taxes' increased use ("A Quiet Revolution in Transportation Finance: The Rise of Local Option Transportation Taxes" - Todd Goldman & Martin Wachs):

  • A sales tax produces high revenue for a low marginal tax rate, although it is susceptible to retail sales declines during recessions.
  • It has a favorable public perception because of strong horizontal equity-individuals of comparable means pay similar amounts of tax - despite it being regressive.
  • It is considered fair from a modal perspective where, for example, bike/pedestrian and transit projects can be funded by users who pay the sales tax, which is not the case when they are funded with motor fuel tax revenues.
  • Sales tax expenditures are a better reflection of ability-to-pay, rather than income or wealth.
  • A sales tax is an attractive way to exact revenue from non-resident users of local transportation facilities.

In California, countywide transportation sales taxes are taking on an increasingly important role in funding the state's transportation needs. These taxes require two-thirds voter approval and the implementation of a project-specific expenditure plan. In 2005-06, the state's Legislative Analyst's Office estimated that of the $9.4 billion in local transportation revenue, about one-third, $3.1 billion, came from local option sales taxes. Local revenue, itself, was nearly half of the $20 billion spent on transportation in California that year.