LOS ANGELES — California Gov. Gray Davis might be setting the stage for political turmoil with a package of proposed tax increases to offset the state’s $34.6 billion budget shortfall, but it’s the 1 percent increase in the state sales tax that has many retailers in the Western region agitated.
This story first appeared in the January 15, 2003 issue of WWD. Subscribe Today.
The increase is part of Davis’ plan unveiled last Friday to help fund social and public health services, like alcohol and drug programs, mental health and child welfare services. Other proposed levies include an increase in personal income tax and a cigarette tax of $1.10 a pack.
If the sales tax increase is passed —the proposal is expected to make its way through the state legislature process via hearings some time before July 1, or the end of the state’s fiscal year — it would contribute $4.6 billion over 2003 and 2004, or half of $8.3 billion in new taxes, according to Davis proponents.
“We need to think about this as a way to protect vital programs for children, for the sick and elderly,” said Anita Gore, a spokeswoman for the state’s Department of Finance, which penned the governor’s proposal.
But retailers say they are already piled high with financial burdens, not the least of which is the disappointing holiday, consumer angst brought on by war fears, and a dour prediction of a slow economic recovery this year.
“This can only compound an already strained retail environment,” said Oren Hayun, principal of Planet Funk. With nine stores serving the young contemporary market in Southern California, Hayun submitted a verbal complaint with the governor’s office on Monday.
California’s current state sales tax rate — 5 percent — is already among the highest in the nation, according to the Federation of Tax Administrators. Sales taxes were last raised in 1991, by 0.25 percent, by then-governor Pete Wilson, a Republican, when the nation was facing a recession. The sales tax rate dipped to 4.75 percent in 2001 because of a surplus in funds, but bounced back to 5 percent last year when funds fell.
California cities and counties tack on additional sales taxes, driving up total rates that range from a low of 7.25 percent in Kern County to 8.25 percent in Los Angeles and 8.5 percent in San Francisco. By comparison, Chicago’s sales tax rate is 8.75 percent, with Illinois’ portion accounting for 6.25 percent. New York City’s 8.25 percent sales tax rate includes a 4 percent state portion. (New York, however, repealed its 4.25 percent tax on apparel items under $110 in 2000.)
Economists say it is difficult to measure how sales tax increases affect retail sales, pointing to big-ticket retailers, like auto dealers, appliance and furniture stores as most vulnerable to a slowdown. Luxury apparel stores could also feel the pinch.
“That’s an almost 10 percent increase on purchasing goods,” said Jill Roberts, owner of two upscale boutiques in Beverly Hills and Santa Monica, noting a state tax portion of 6 percent would push up rates in both cities to 9.25 percent. “On a $500 coat, that’s almost an extra $50. That’s huge,” she said.
Mark Goldstein, owner of four Madison boutiques in the Los Angeles area, believes the government should “stimulate revenue growth not stifle it,” urging Davis to take a cue from the housing market currently getting a boost from lowered interest rates.
Other observers point out that more savvy customers could turn away from brick-and-mortar retailers altogether to place purchases on the Internet, where no sales taxes are currently collected. A 2001 University of Tennessee study noted that California loses $1.7 billion in sales taxes from online purchases, a number the study projected could triple by 2006, — to $5.9 billion — if no ’Net tax code is enacted.
Meanwhile, there is pressure mounting this week in the governor’s office. As of Monday, there was a “cacophony of opposition to every single budget cut,” according to a spokeswoman for Davis.
Bill Dombrowski, president of the California Retailers Association, believes the proposal doesn’t have the two-thirds of the legislature it needs to pass. “I’m confident it won’t pass in its current form,” he said, noting that he has heard little rumbling from CRA members, which include Gap, Macy’s West and Robinsons-May. Calls to Gap and Robinsons-May were not returned; Macy’s West declined comment.
A more pressing concern, said Dombrowski, is another possible labor-backed proposal to increase the state’s minimum wage. Last Friday, the Industrial Welfare Commission, a body comprising five governor appointees that oversees the state’s wage and hour issues, heard a labor-backed proposal to increase minimum wage by 50 cents starting on July 1, 2003, and again by 75 cents on July 1, 2004. The IWC, which includes two labor representatives, two business representatives (including Dombrowski, who is also IWC chairman) and one public representative, voted 3 to 2 against the raise.
By law, the IWC must consider the adequacy of the minimum wage every two years. The IWC last voted for an increase on Oct. 23, 2000, which called for a two-part raise — 50 cents to $6.25 on Jan. 1, 2001, and another 50 cents to $6.75 on Jan. 1, 2002, where the floor wage remains.
“A labor representative did say at the hearing that they would probably file a new petition,” said Dombrowski. “We’ll see.”