SAN FRANCISCO — California Gov. Jerry Brown on Wednesday launched his campaign to secure voter approval to temporarily increase the state sales tax by a half percent and raise personal income taxes on the wealthy.
This story first appeared in the January 19, 2012 issue of WWD. Subscribe Today.
In the governor’s annual address before the state legislature, Brown said the tax increases — supported by retailers — are key to closing the state’s yawning budget deficit that in turn would bolster California’s economic recovery.
The nation’s most populated state is still burdened by high unemployment and lags the nation as a whole in economic growth since the recession. California’s jobless rate is 11.3 percent, the second highest in the U.S. next to Nevada’s 13 percent, as of November, the latest statistics available. In contrast, the U.S. jobless rate for the month was 8.7 percent, improving to 8.5 percent in December.
In arguing for voter approval of higher taxes, Brown said the economic malaise in Europe caused by its debt crisis is instructive. “Prudence and paying down debt is the best policy,” he argued.
However, he noted that “California is on the mend,” with the state deficit just one-quarter of the $20 billion owed a year ago. The change was the result of severe cutbacks in public services as well as an increase in tax coffers from rebounding businesses.
If voters approve Brown’s referendum in the Nov. 6 general election, the state sales tax would increase to 7.75 percent from 7.25 percent, effective Jan. 1, 2013, through Jan. 1, 2017. This would restore half of the sales tax revenue lost July 1, when the rate declined by one percent as state lawmakers let expire an earlier temporary increase.
“It’s fair. It’s temporary,” Brown told lawmakers, previewing his pitch to voters for the sales tax hike, estimated to raise $6.9 billion.
The increase in personal income taxes for higher-income Californians would take effect this tax year and last through 2017. The change would range from paying 1 percent more for those with incomes from $250,000 to $300,000; 1.5 percent for incomes from $300,000 to $500,000, and 2 percent for tax brackets above that.
While retailers ordinarily resist tax increases, concerned about dampening consumer spending, department stores and other retailers in California are nonetheless backing Brown’s temporary proposals as necessary for bolstering the state’s economy, said Bill Dombrowski, president and chief executive officer of the California Retailers Association.
Dombrowski said retailers are raising money to support Brown’s referendum campaign, which the lobbyist expects has a 50 percent chance for passage. “It’s a tough sell,” he said. In addition to Californians’ historical resistance to higher taxes, there are also competing tax-increase measures on the ballot put forth by citizen groups, such as one to raise money for public schools.
“It’s looking like it’s going to be a really large ballot” full of tax initiatives, Dombrowski said. “Voters get frustrated and vote no.”
The usual high voter turnout for a presidential election could slightly improve chances for Brown’s tax proposal, said Corey D. Cook, a political science professor and director of the University of San Francisco’s Leo T. McCarthy Center for Public Service and the Common Good.
Regardless of political affiliation, Californians have bristled at tax increases since the landmark voter revolt with Prop 13 in 1978 that restrained property tax hikes. Still, Cook said benefiting Brown’s tax proposal could be the public’s realization that further drastic cutbacks in public services — the hallmark of state budgets since the recession — are the only alternative.
According to a recent Public Policy Institute of California survey, 60 percent of likely voters favor the governor’s twin tax increase proposal. Regarding the economy, 49 percent of those surveyed said their financial situation is about the same as a year ago, while 35 percent said they’re worse off and 15 percent said their pocketbooks are doing better.
Economists with the state legislature are generally optimistic about the state’s economy, according to their analysis of the governor’s proposed 2012-2013 budget now before lawmakers.
“The California economy is being pulled along, in part, by healthy wage and salary growth in high-income markets — most notably the technology sector in Silicon Valley and other areas of the state,” the Legislative Analyst’s Office said. Another bonus for optimism is the expected “Facebook Effect and the possibility of hundreds of millions of dollars of additional (state) revenues related to the Facebook initial public offering,” the report said of the social media company’s pending stock offering and resulting capital gains taxes.
As for expectations at retail, “consumer spending also has picked up in California, as individuals and firms return to more normal consumption behavior fueled, in part, by pent-up demand,” the LAO said, noting the possibility this trend could waver.
California’s economy also must be viewed region by region in this vast state where the technology-rich Bay Area in the north is showing improved employment prospects in contrast to elsewhere. For example, San Francisco’s jobless rate is 7.8 percent in contrast to Los Angeles’ 11.5 percent and San Diego’s 9.2 percent.
Still, in the Bay Area, employers remain on their guard, according to the Business Confidence Index released Jan. 11 by the Bay Area Council. Based on a survey of 450 ceo’s, the index found that 43 percent consider economic conditions will improve over the next six months, while 39 percent expect no change and 18 percent forecast a worsening.
While there’s reason for optimism, “the results…highlight the fragility and unevenness geographically of our recovery and the imperative for doing everything we can to foster an economic and policy climate that encourages investment and hiring,” said Jim Wunderman, council president and ceo.