Beyond the recession, there’s another worry for many California businesses: a proposal from Gov. Arnold Schwarzenegger to extend the state sales tax to several sectors of the service industry.
The proposal is part of a plan to bring in billions of dollars to help close the state’s $42 billion budget deficit for the next 18 months.
The plan also calls for a 10% oil extraction tax and a “nickel-per-drink” increase in the alcohol excise tax. And it would raise the statewide base sales tax by 30% to 6.5 cents per dollar from 5 cents per dollar for the next three years.
In Orange County, the sales tax would go from 7.75% to 9.25%.
All told, the state projects that the increases would raise $2.6 billion in revenue for the 12 months through June and $8.3 billion for the 12 months through June 2010.
“Expanding taxes to cherry-picked services is putting businesses in a frightening position,” said John Kabateck, executive director of the California chapter of the National Federation of Independent Business, a small-business trade group. “They are looking at steep unanticipated costs that they haven’t budgeted for and at a time when they are already under extreme pressure from the recession and scrambling unsuccessfully to get loans.”
As a result, business leaders are scurrying to find ways to halt or at least slow the proposals.
The golf industry has formed an alliance to fight the governor’s plan to tax green fees, golf club dues and related services. Auto body shops have begun faxing letters to the governor and have planned a statewide meeting for early next month to plot further strategy. And the oil industry is marshalling its forces to defeat a proposed 10% tax on oil extracted from California.
The plan would extend the sales tax to seven industry segments: auto repair shops, furniture and appliance repair services, amusement parks, sporting events and golf courses and veterinary services.
According to H.D. Palmer, spokesman for state budget director Mike Genest, the industries were selected because most already pay some sales tax.
In auto repair shops, the state already taxes the sale of parts. Under the latest proposal, labor also would be taxed.
“The framework for sales tax collection is already there,” Palmer said.
Business Incentives
To offset the negative impact all these tax increases would have on business, Schwarzenegger has proposed easing a number of state laws and regulations on business to help stimulate job creation and boost the state’s economy.
These include the repeal of the daily overtime pay requirement, more flexibility on providing meal and rest periods for workers and easing of environmental regulations on some major public works projects.
All of these so-called stimulus measures have long been sought by business groups, which is one reason why some business leaders have not been particularly vocal in opposing the tax proposals.
“In the governor’s proposal, the silver lining is on his insistence on economic stimulus proposals,” said Kabateck, of the National Federation of Independent Business, which represents thousands of small businesses.
Approval of Schwarzenegger’s budget plan is far from certain. Republican lawmakers in both houses have steadfastly opposed new tax measures,at least in public. And it’s by no means certain that Democratic lawmakers will go for all these new levies either. And Democrats oppose most of the stimulus measures put forward by Schwarzenegger.
Adding urgency to the budget negotiations is the prospect that the state could run out of operating cash by early February, forcing it to issue IOUs in lieu of payments.
Schwarzenegger does not want to place more taxes on businesses and consumers, according to Palmer.
“But the speed with which this budget deficit has exploded in the last 90 days has forced us to put these revenue options on the table,” he said.
Under the budget plan put forward on New Year’s Eve by Schwarzenegger, the extension of the sales tax to appliance and furniture repair shops, vehicle repair and veterinarian services would take effect just weeks from now on March 1. Amusement parks, sporting events and golf courses would get hit on April 1.
Bob Bouchier, executive director of the Pebble Beach-based California Alliance for Golf, which was formed last year in an attempt to unite the industry’s lobbying efforts, said the proposed tax increase is the group’s first major test. Bouchier said it has “galvanized” the industry.
“You take an industry that is subject to economic cycles just like any other and all of a sudden, you put a new tax on, and the impact will be dramatic,” Bouchier said.
Auto Impact
About two-thirds of the total revenue from extending the sales tax to services would come from the auto repair industry, which only now is beginning to mobilize against the proposal.
The Sacramento-based California Autobody Association has been sending protest letters to Schwarzenegger’s office and is planning to send letters to legislators in the next several days. Labor typically is about 60% of a repair bill.
“It’s plain flat-out not good for our business,” said Chip Fabrizio, director of Cormier Collision Center in Long Beach and president of the South Coast chapter of the Autobody Association. “Our business is already down about 35% from year-ago levels. If people already are holding back on getting repairs, adding this tax will only make this worse.”
Even industries not targeted in Schwarzenegger’s plan are worried that they might be next, business leaders said.
But California’s budget deficit is so huge that some concede that some tax increases are inevitable.
“There’s no way that you can balance this budget simply by cutting costs,” said Allan Zaremberg, the generally hawkish president of the California Chamber of Commerce in Sacramento. “But when you go about raising revenues, you must do so in the most broad-based way that does not adversely affect the economy.”
The proposed temporary increase in the current base sales tax rate would qualify as such a broad measure. But few are convinced that such a tax increase would be taken off the books in three years.
“Come on, do you really think that tax would be repealed?” asked Bouchier.
Fine is a staff writer with the Los Angeles Business Journal.
