Retailers and vendors in California were spared increased taxes and fees in the agreement to close a $26.3 billion budget gap but the state’s economic woes are far from over.
The deal reached Monday night — provided it gets the two-thirds majority required to pass in the state Senate and Assembly — will result in painful cuts to state services and programs, but should enable California to stop issuing IOUs, which major banks stopped honoring last week. California’s credit rating has fallen to near-junk status and the crisis forced furloughs of state employees.
Sales and income taxes and vehicle license fees increased during the first round of budget negotiations in February. The new accord reached by Gov. Arnold Schwarzenegger and legislative leaders will result in businesses and individuals paying taxes sooner.
However, the agreement ended the prolonged and crippling stalemate and was a relief for businesses struggling with deep declines in consumer spending and rising unemployment and home foreclosures.
“There was just a negative vibe in the air with things unsettled, and yesterday I felt a breath of fresh air,” said designer Allen Schwartz, whose A.B.S. line is based in Los Angeles. “No matter who you are, business has been challenging, so we are all rooting for each other.”
The absence of more taxes is particularly meaningful.
“That’s good news,” said Jaye Hersh, owner of Intuition boutique in Los Angeles. “People are already shopping sales and only buying what they can absolutely justify.”
Hersh said she stopped carrying merchandise above the $200 range about nine months ago in preparation for a drop in consumer spending. She recently launched a line of lower-price-point accessories with Target that she’s hoping will help buoy her brand.
“As far as my personal business, I had to make my merchandise very approachable,” Hersh said. “This will spell trouble for retailers who can’t move quickly with respect to lower inventory and price point, and that’s something that will trickle down and hurt us all. The more aggressive they get with their markdowns the more it will affect anyone in the regular price business.”
The state sales tax increased by 1 percent in April, and with the Los Angeles County sales tax at 9.75 percent, experts said additional increases would have further depressed consumer spending.
“There was some discussion of adding new taxes, which during a recession is the worst thing you could do,” said Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange, Calif.
Despite the budget accord, Adibi said the economic outlook for the state is unchanged, with more job losses coming for state employees, a situation that would only exacerbate the already crushing 11.6 percent unemployment rate.
“We are not going to suddenly get a boost in all of these tax components to go back to what the budget was [before the recession] if we do just temporary measures,” he said.
Economists said data suggests a national economic recovery will begin in the fourth quarter, but California will lag national trends because of the depth of the recession in the most populous state.
“The deficit is no longer growing, which is good news, but these are deep and painful cuts to state programs and diversion of local government funds [into state coffers], which hands part of the problem down the line,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “The damage has already been done; it will take the state years to recover.”
The impact on California’s apparel and manufacturing industries could be punishing.
“There are no incentives for anyone to open a new business, start a new business or grow their business and that’s going to be so, so damaging,” said Ilse Metchek, executive director of the California Fashion Association.
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