By  on February 13, 2009

Struggling California retailers face a temporary one cent sales tax increase as part of a deal to close the state’s $42 billion budget deficit and break a 14-week legislative deadlock.

The sales tax boost would be combined with a 5 percent surcharge on personal income tax, an increased gasoline levy and higher fees, as well as widespread spending cuts. The taxes would expire in two years, but voters could choose to extend them.

However, corporations that don’t have out-of-state facilities would receive a tax break. They would have the option of changing how they calculate their state taxes, choosing to be taxed on sales only, instead of a formula based on size of payroll, sales and California property they own.

Industry executives and economists said the spending agreement was positive news for the troubled economy of the most populous state and might have a slight trickle-down effect at the cash register.

“Psychologically, just getting a deal signed will help,” said Ilse Metchek, executive director of the California Fashion Association. However, Metchek said the sales tax increase could also drive consumers to shop online, where sales from out-of-state retailers aren’t taxed.

California’s bond rating has fallen to last place nationally, which means the state is unable to easily borrow money to operate. State government workers are being furloughed without pay for two days a month, bridge and road construction has been halted and funds for schools and universities have been cut. The state has suspended tax refunds and payments to vendors. The unemployment rate is 9.3 percent.

“There’s been much chaos,” said Jack Kyser, senior vice president and chief economist with the Los Angeles Economic Development Corp. “With a budget agreement, at least there is some certainty, even though the solution is going to cause pain for consumers and businesses,”

The sales tax would rise to 9.75 percent in Los Angeles County, 8.75 percent in San Diego and 9.5 percent in San Francisco, which is considering another half-cent increase to close an estimated $576 million city budget deficit.

The federal government’s $789 billion economic stimulus plan could offset some of the cuts in the form of job-creating projects. However, Kyser said, “The economy will continue to struggle into 2010 and more budget problems will crop up.”

Jon Havemen, a partner in Beacon Economics in San Francisco, said a 1 cent increase in the sales tax would have a “negligible effect on consumer spending.”

“The issues facing retailers in this economy are so much more than a 1 cent increase in sales tax,” he said.

The legislature is expected to vote on the tax today.

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