Pain Tempered, But Businesses Still Facing Higher Costs in New Budget

By HOWARD FINE
Staff Reporter

Gov. Gray Davis' revised budget may be less of a hit on business than his original January blueprint, but that's little consolation to companies reeling from record increases in workers' compensation premiums and higher energy and health costs.

In his May revise, Davis bowed to pressure from both sides of the Legislature and opted to push $10.7 billion of the record $38.2 billion budget shortfall into future years through long-term borrowing. That allowed the governor to scale back some of the massive tax increases and cuts he proposed in January.

Nonetheless, businesses throughout the state would still be hit with a "temporary" half-cent sales tax increase, a 150 percent increase in vehicle license fees, a 1 percent hike in the personal income tax rate for high-income brackets and a tax increase of up to 40 cents for a pack of cigarettes.

"Sure, it's a slight improvement over the January budget, but these are still significant tax increases. When you combine that with the outrageous hikes in workers' comp premiums, it all hinders the ability of businesses to create jobs," said Michael Shaw, assistant state director for the National Federation of Independent Business, which represents small businesses.

Davis' budget must still garner two-thirds support in the Legislature to become law. And there is widespread belief that before it does pass, there will be major changes. Republicans steadfastly oppose all of these tax increases, although there is speculation that they may yield at the last minute on the cigarette tax and possibly even the temporary sales tax.

Meanwhile, some Democratic leaders are pushing for further tax increases to stave off cuts to education, health care and social services that remain in the revised budget.

"My biggest concern all along about this budget is that it takes a balanced approach," said Assemblywoman Jenny Oropeza, D-Long Beach. "That remains a concern."

Oropeza, who chairs the Assembly Budget Committee, said she expects the revised budget to have an easier time passing than the original budget proposal released in January.

Car dealers hurt

Although all the tax increases in Davis' revised budget are ostensibly aimed at other groups, businesses would be affected in each case. Businesses pay one-third of all sales taxes and vehicle license fees in the state. Many small businesses file their taxes under the personal income tax. And retailers would be hit by higher cigarette taxes as smokers either turn to the Internet or the black market.

Car dealers figure to be among the hardest hit, since they would be hit by the double-whammy of sales taxes and vehicle license fee hikes.

"Look at what a car dealer must face," said Richard Costigan, chief lobbyist with the California Chamber of Commerce. "On a $20,000 car purchase, you're talking about paying $100 more in sales taxes and at least $250 more in vehicle license fees all at the front end of a deal. You can't tell me that won't make a difference in whether someone decides to make a purchase."

If people decide to postpone buying that car, then all the sellers of auto aftermarket products suffer, too, Shaw said.

The income tax hike, a 1 percent rise for single filers earning more than $150,000 and couples earning more than $300,000, is portrayed as a "tax on the wealthy." But many individual proprietors, partnerships and "sub-s" corporations file their taxes under the personal income tax.

"If you are paying higher taxes as a business owner, then there is that much less money available to put back into the business in the form of new equipment purchases, higher salaries and benefits or even hiring of additional workers," Shaw said.

What hurts more than the actual amount of these tax increases is their timing, according to Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University.

"Any time tax increases are enacted during a recession or economic slowdown, it puts adverse pressure on the economy," Adibi said. "To get out of an economic slowdown, you need to boost consumer spending. And these tax increases hurt consumer spending."

The most harmful tax, Adibi said, would be the sales tax increase. "It's highly regressive and will hurt most the people at the lower end of the income spectrum," he said.

Taxes become permanent?

In his May revise, Davis stressed that this sales tax hike is only temporary, lasting about five years until all the $10.7 billion deficit financing bonds the state plans to sell later this year are paid off.

But neither Adibi nor the business advocates contacted believed the tax would disappear at the end of five years.

"Have you ever known a tax to go away?" Adibi asked. He noted that 11 years ago, then-Gov. Pete Wilson also proposed a temporary hike in the sales tax to fund local police and fire service. When that tax was due to expire, local officials decided to sponsor a ballot measure, Proposition 172, to make that tax increase permanent. The measure passed.

"Once you tap into a source of funding, no one who receives those funds ever wants to give it up," said Costigan.

Nonetheless, Costigan said businesses would be willing to stomach this and other tax hikes if legislative reforms could significantly reduce workers' compensation costs.

"Look, we've got member companies who are small businesses that are being hit with increases in their workers' comp premiums of $30,000 or $40,000," Costigan said. "Even if you add up all these tax increases, they still pale in comparison to the damage that workers' comp is wreaking."

Besides, he said, if workers' compensation reforms are passed, local governments would save millions of dollars. "That would free up hundreds of millions of dollars statewide to put in roads, schools and social services. Then the state wouldn't have to dig deeper into the red for these things."

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