Californians start feeling the pain of the recently negotiated state budget fix on Wednesday, when a 1-percent increase in the state sales tax forces consumers to pay more for goods such as cars, furniture, laptops and toys.
California's sales tax is now at 6 percent, bringing the average local sales tax rate to almost 9 percent -- one of the highest in the nation. Residents of Pico Rivera and South Gate in Los Angeles County are taking the biggest hit. By July, sales in those cities will be taxed 10.75 percent, the highest in the state.
Businesses and manufacturers are worried that the temporary tax increase could prolong the worst recession in recent memory and further dampen retail sales. In the coming months, Californians will also see an increase in personal income taxes and higher fees to license their vehicles.
"There's no doubt in my mind that our sales will go down because of this," said Beau Boeckmann, vice president of Los Angeles-based Galpin Motors, which he claims runs the largest Ford dealership in the world. "It's an unfortunate truth. I hope the governor will reconsider doubling our car taxes. I think the sales tax is going to hurt us and the car tax can cripple us."
Gov. Arnold Schwarzenegger and lawmakers agreed to $12.5 billion in tax increases as part of a $42 billion deficit-closing plan to help stave off what they described as devastating cuts to education and health care. Despite the higher taxes, state programs also face major cutbacks, and the state is struggling with double-digit unemployment.
The sales tax is expected to bring in an estimated $5.8 billion before it expires on July 1, 2011, but could last another year if voters agree to extend it as part of a package of budget-related initiatives in a May 19 special election. State officials predict consumers will spend less because of the tax, and included a 1 percent reduction in their revenue calculation.
Besides a higher sales tax, the state will impose a 0.25 percent increase in the personal income tax rate in the 2009 and 2010 tax years and a 0.5 percent increase in fees to license vehicles from this May to July 1, 2011. A fourth tax increase reduces the dependent care credit parents and caregivers can claim to $99 from $309 for the 2009 and 2010 tax years.
"Governor Schwarzenegger abhors taxes. Always has, always will," said his finance spokesman, H.D. Palmer. "That said, you could not in his view close a record budget gap of $41.6 billion by cuts alone without decimating education and health care and other critical programs."
Gino DiCaro, spokesman for the California Manufacturers and Technology Association, a trade group that represents everything from Boeing to Del Monte, said businesses had no choice but to swallow the tax.
"I don't think there's any doubt it will aggravate the recession further, but given the state of California, there just wasn't any choice," DiCaro said.
The influential lobbying force said manufacturers are at a disadvantage in California because it is one of just three states that impose a sales tax on business equipment. The group is lobbying lawmakers for an exemption.
According to the Tax Foundation, an independent Washington, D.C.-based nonprofit that educates the public about taxes, the median national rate of state and local government sales taxes was 5.5 percent at the beginning of 2009. The last time consumers across the state saw an overall rate increase was 2002.
Steve Levy, director and senior economist of the Center for the Continuing Study of the California Economy, described the package of higher taxes as a shift in wealth from the private sector to the public sector. Taxable sales make up about $600 billion of the state's $1.7 trillion economy.
Levy said the sales tax increase will reduce consumption in California but cutting teachers and health care workers could have been worse for the economy.
"It's a choice about priorities," he said.
If Proposition 1A on the May 19 special election ballot passes, Californians will pay even more.The measure, one of five budget-related initiatives on the ballot, asks voters to limit the amount the state can spend each year based on revenue growth. In exchange for tougher spending restrictions, all four of the tax hikes would be extended by one to two years.
With the tax increases looming, auto dealers such as Galpin Motors reported brisk business. Boeckmann said sales last weekend doubled from the previous one, which he attributed to consumer psychology over the increase.
But Boeckmann said that wasn't nearly enough to overcome recent losses: He said the Ford dealership is likely to hit just 3,000 sales this year, compared with nearly 12,000 record vehicles sold in 2000.
Ironically, Schwarzenegger used the Boeckmann family's dealership in 2003 as the backdrop for one of his first acts as governor -- reducing the state's vehicle license fee, which later cost the state about $6 billion in revenues.
Boeckmann predicted the tax package will not generate the $12.5 billion in revenues state officials hope to get.
"I think we'll end up losing far more taxes," he said. "I think we should be figuring out how to stimulate, to give more taxes and to keep people at work."
Consumers will likely adjust to the higher rate over time, said Bill Dombrowski, president and chief executive of the California Retailers Association.
Kathryn M. Jaques, an accounting instructor at San Diego State University, said the sales tax increase isn't going to stop her from buying a car.
"I really had intended to get that done before all this hit but I had knee replacement in March," Jaques said. "It's not going to stop me from buying another car. It's not the decider. If I need the car, I'm going to buy it."