Sunday, Aug. 24, 2008

Could 1-cent sales tax raise be the last straw?

After six years without a state sales-tax hike, Gov. Schwarzenegger is proposing a temporary 1-cent increase.

For some, the tax is reasonable, but for others, it could make things rough in an already-tough economy.

"With the economy going the way it's going, I'm really tightening my budget," said Knute Nelson, 63, of Denair. The grandpa was in Modesto on Saturday with his family. Surging gas and food prices are making it so that Nelson "really can't take more taxes right now."

As the state budget stalemate approaches its third month, the governor and legislators are looking for ways to pass a budget and recover money hemorrhaging from the struggling economy. But some believe an additional 1 cent in sales tax would scare away consumers already trimming their spending.

The Republican governor, who has long vowed not to raise taxes, floated the proposal in private talks with legislators as a way to help close a $15.2 billion gap in the state's 2008-09 spending plan.

The state sales tax was last raised Jan. 1, 2002, when the state's worsening finances triggered an automatic increase of 0.25 percentage points to 7.25 percent.

"I'm fine with it. We've been waiting since (the state sales tax) hasn't gone up for a while," said Cherie Keller of Keller's store in McHenry Village.

A one-penny hike is estimated to bring in about $6 billion, though the amount would be less for this year because the fiscal year is already under way.

"I think, of all the ways to bite the bullet, this might be the best one," said David Barbaree, 57, a Modesto schoolteacher.

The statewide rate of 7.25 percent would jump to 8.25 percent under the governor's plan, but would be lowered in three or four years below the 7.25 percent rate, according to published reports. Most residents pay more than the state rate, though, because local governments add taxes.

Ceres voters approved a half-cent sales tax in April to fund expansion of services and equipment in their fire and police ranks. Stanislaus County also has a 0.125 percent sales tax for the library, and Sonora charges a half-cent sales tax. A half-cent transportation sales tax increase in Stanislaus County is on the November ballot.

Mandy Mejia, 17, and her Livingston High School classmates weren't having much luck touring Modesto on Saturday hoping to find some businesses that would buy ads in their yearbook. The teenager said the cent increase would limit her spending at the same time the souring economy is causing her part-time employer, Little Caesars Pizza, to cut employee hours.

"I think they (politicians) should go elsewhere to make up the difference," she said.

Most food and services are exempt from sales taxes. For most taxable purchases, a "change in the sales tax rate probably will not be all that apparent or obvious to consumers," said Keitaro Matsuda, senior economist for San Francisco-based Union Bank of California.

However, a recent report by the state Board of Equalization suggests that consumers would cut back on purchases, and the tax hike would raise $5.5 billion a year -- less than the widely cited $6 billion figure. The decreased economic activity would lead to more than 50,000 jobs lost, according to the report.

The Fresno Bee contributed to this report.

Bee staff writer Michelle Hatfield can be reached at mhatfield@modbee.com or 578-2339.