Job loss, business impacts seen in proposed sales tax hike

An analysis by the state agency that collects California's sales taxes suggests that a one-cent increase in the statewide sales tax would bring in hundreds of millions of dollars less than anticipated and cost thousands of jobs.

The report was prepared by Joe Fitz, the chief economist of the state Board of Equalization, at the behest of board member Bill Leonard, a Republican who represented an Inland Empire seat in both the Assembly and Senate before being elected to the board in 2002. Fitz's three-page memo is dated July 7, several weeks before Gov. Arnold Schwarzenegger's proposed sales tax increase to help balance the budget became known outside the Capitol.

The analysis reflects an estimated $6 billion of new revenue from a proposed sales tax hike, or about $1.499 billion per quarter-penny of increase, plus $187 million from the elimination of exemptions for some farm equipment and fuel. The memo said the figure was derived from consultations with Schwarzenegger's Finance Department and Air Resources Board. The Legislative Analyst also has estimated a yearly sales-tax revenue increase at $1.5 billion per quarter-penny.

Based on those numbers, the proposed sales tax hike would bring in $5.692 billion, some 8 percent, or $495 million, less than projected for the combined projected revenues for the tax hike and farm machinery-fuel exemptions.

Among its other functions, the Board of Equalization collects the sales taxes, tracks business activity, assesses utilities' property and serves as a tax-appeals board.

The governor has proposed temporarily boosting the statewide sales tax by one cent. Currently, the sales tax averages about 7.25 percent in California's 58 counties, an amount that varies depending on locally approved taxes. The governor's plan would raise it to about 8.25 percent.

California has about $665 billion in taxable sales each year.

A significant increase in the sales tax traditionally has other impacts. For example, some people may spend less or defer major purchases in order to avoid the extra costs as the sales tax rises.

According to the analysis, it also could result in a loss in business investment of $660 million and some 58,000 lost jobs. The job loss was not detailed, but the analysis suggested that the pass-through of added costs to consumers would affect purchasing levels and cut into retail jobs.

Leonard, who was attending a board meeting in Southern California, was not immediately available to comment.

But in his July 21 newsletter, Leonard described the job-loss and decline in business investment as an "on-going, year-after-year shortfall once the effect of the tax hike filters through the economy. This is eerily familiar territory for those who remember Gov. Wilson's tax increases came in $1.8 billion short of static estimates over the first three years."

A spokesman for the governor said, "We are not discussing what is being negotiated in the Big 5," a reference to the four legislative leaders and the governor.