Will sales tax hike hurt?

By Dan Walters

California’s unemployment rate soared to 7.3 percent in July, with nearly 400,000 more workers in the jobless ranks than a year earlier, indicating that we still haven’t hit bottom in this recession.

What started out as a sudden meltdown in the housing industry has spread to many other sectors, most obviously retail sales. Auto dealers are closing their doors throughout the state, and the Mervyns department store chain has sought bankruptcy protection, to cite but two examples.

Steve Levy, who runs the Center for the Continuing Study of the California Economy, has devised a “misery index” of unemployment and inflation rates. With the new jobless numbers and rising food and energy costs, he says his index is the highest it’s been in 15 years.

In Sacramento, meanwhile, Gov. Arnold Schwarzenegger and legislators are struggling, so far unsuccessfully, to close a $15-plus billion gap in the state budget as revenues stagnate and demands for health and other services spike upwards.

Schwarzenegger and Democratic leaders of the Legislature apparently have a conceptual agreement on a budget package that includes a 1-cent boost in sales taxes that would raise about $6 billion a year. So far they have been unable to nail down enough Republican votes to enact it, even though the budget is two months late.

Given the bad economic news — and our uncertainty how deep the recession will be and how long it will last — we must ask a question without a clear answer: Would raising taxes, especially sales taxes, make the economic situation even worse?

The proposed sales tax would boost California’s overall sales levy, including local add-ons, to over 10 percent in many areas, putting the state at or near the top in sales taxes nationally.

Economic impact?

Would making all taxable retail purchases — cars, clothes, appliances, gasoline etc. — one percent more expensive have a serious economic impact?

Adding $200 to the price of a $20,000 car could be a deal-breaker in some circumstances, but it would be scarcely noticeable in everyday spending.

The $6 billion in sales taxes, moreover, would not be taken out of the economy. Spending by government and its employees is still spending.

That said, the sales tax is a “regressive” tax, in that it falls more heavily on the poor because they spend greater portions of their incomes on taxable goods than do the rich.

This all means that when it comes to closing budget deficits, there are no easy choices.

Scripps Howard News Service