Budget Deficit's Impact May Soon Hit Retailers
The end result of the holiday shopping season is front and center on the minds of retailers and apparel manufacturers, but another issue should at least be on the back burner: California’s budget deficit.
Gov. Gray Davis has announced that the shortfall has ballooned to $34.8 billion through 2004. That means businesses and individuals could get hit with tax hikes and the repeal of tax credits in the coming year. Already feeling the pinch are students at the University of California and California State University systems.
With sales tax projections off by $2 billion through 2004, chief among the concerns for retail veterans is a proposed sales tax hike from the base state sales tax, which now stands at 7.25 percent. Every percentage increase brings in about $4 billion, said Fred Main, senior vice president of the California Chamber of Commerce.
“There’s a question about the point at which a highenough tax dampens sales, and there hasn’t been a good answer,” Main said.
In addition, California manufacturers could face the prospect of losing a major tax credit that saves them as much as $450 million a year and that was aimed at stimulating job growth. The 8-year-old statute provides companies with a 6 percent tax credit to offset the cost of installing new equipment, from cutting machines to design software tools. The legislation included a provision that the tax credit would remain in effect only if there were 100,000 more manufacturing jobs in 2001 than in 1994. Legislative analysts report that the current number of manufacturing jobs is 1.799 million, short of the 1.877 million needed.
Indeed, the exodus of manufacturing firms has been a major reason why jobs have plummeted in California. Perhaps no greater symbol of the decline was the announcement earlier this year by Levi Strauss & Co. to shut its historic manufacturing facility in San Francisco.
It’s that reason, however, why tax credits are critical, especially as apparel officials try to woo new business to the region or to encourage businesses to grow their operations.
“I’m not sure manufacturers are aware of the impact of the credit now, but they will be when they start their businesses or expand,” said Ilse Metchek, executive director of the California Fashion Association.
The prospect of higher business taxes can also mean companies will look to cut costs elsewhere, such as their labor pool.
“If the response to the deficit impacts employment, that will hurt consumer confidence, which will hurt retail sales,” said Richard Giss, a partner in the consumer practice at Deloitte & Touche LLP.
That’s a concern for juniors-minded retailers, who rely on the largesse of their customers’ parents to help foot the bills.
“Our customer is a 19-year-old girl who won’t change her spending unless her parents lose their jobs or decide to cut back and not give her money for a prom dress—that would concern me,” said Leon Zekaria, president of the Los Angeles–based chain Windsor Fashions.
Those merchants catering to high-end clients also are taking stock, especially if the personal income taxes in the top tiers get a raise.
“The deficit won’t help—it will be another damper on the business,” said Lisa Kline, owner of upscale boutiques Lisa Kline and Lisa Kline Men on Robertson Boulevard in Los Angeles. “Already, we’re seeing that people are holding back—I’m not selling as many presents this year as in the past and it will probably get worse in January. I’m not worried. I know it will turn around; I just have to be cautious in ordering.”