Booming Economy Triggers 1/4-Cent Cut in Sales Tax

Gov. Gray Davis, carrying out for the first time a law enacted under his Republican predecessor, on Wednesday announced a one-year sales tax cut that will save Californians $1.1 billion.

The quarter-cent reduction will take effect Jan. 1 and was triggered under a 1991 law by the continuing expansion of California’s economy, which has resulted in tax payments far in excess of Department of Finance forecasts.

While in dollar terms the cut is among the largest tax reductions in recent years, on an individual level the savings may not be noticeable. By Davis’ estimate, the average savings will be $31 per person in 2001, or about $120 for a family of four.

But proclaiming that the cut will benefit every California consumer, Davis said: “This is an appropriate way to share with the taxpayers of this state some of the bounty they have bestowed on us.” The Democratic governor attributed the cut to “a very strong economy and my administration’s commitment to responsible fiscal policies.”

If the economy dips next year and tax payments fall, the quarter-cent tax would reappear in 2002. However, the pressure will be significant on Davis to keep the cut in place, given that he would face the prospect of being accused of raising a tax in a year when he faces reelection.

California’s minimum sales tax rate is 7.25%, among the highest of all 50 states. Most of the 58 counties impose extra sales taxes.

The current rate in Los Angeles County is 8.25%. In Orange, Riverside, San Bernardino and San Diego counties, the rate is 7.75%. San Francisco has the highest rate at 8.5%, and Ventura County’s is 7.25%. Rates in each county will fall by a quarter-cent in 2001.

The sales tax reduction is in addition to other recent tax cuts, including a $1.4-billion cut in the annual tax people pay to register their cars, and the governor’s $200-million tax credit for teachers.

Whether the sales tax cut will be felt by Californians remains to be seen.

“It is just such a minute amount, why bother? Don’t waste my time. The gesture wouldn’t be noticed,” said Eileen O’Connor, 35, a legal assistant for a San Diego law firm.

However, many businesses will see benefits. Home builders pay sales taxes on building materials. Truckers and farmers who buy trucks or tractors will see more significant savings. Business purchases account for a third of the sales tax payments.

Consumers may notice the cut on big purchases. They will save $50 on a $20,000 car in 2001, for example.

“We get a lot of folks who are not millionaires,” said Fred Kabir, sales manger at Longo Toyota in El Monte. “Any $50 or $100 that we can save helps us to sell a vehicle and helps them to buy.”

The announcement comes less than two weeks before the Nov. 7 election, although Davis said his decision had nothing to do with the campaigns. By law, the decision to pare the sales tax had to be made by Nov. 1.

It also comes as a Los Angeles Times poll shows that the governor’s popularity has slipped slightly. Completed Monday, the poll shows that registered voters approved of his performance by a 59%-26% margin, with the rest expressing no opinion. In February, The Times poll showed that registered voters approved of his performance by a 67%-20% margin.

Davis was obligated by state law approved during Republican Gov. Pete Wilson’s tenure to cut the sales tax.

In 1991, as they struggled to close a $14-billion budget deficit, lawmakers and Wilson approved a variety of tax hikes, including a quarter-cent sales tax increase. A provision of the 1991 law says that if the state budget surplus tops 4% of the state’s general fund for two years running, the quarter-cent must disappear for a year.

Last year’s reserve amounted to 10%. Finance Director Tim Gage predicts the reserve will exceed 4% of the current fiscal year’s $79-billion general fund, thereby requiring that Davis roll back the sales tax.

The governor’s announcement Wednesday marks the first time the tax-cut provision of the 1991 law has been triggered.

After personal income taxes, the sales tax is the second largest source of money for the state, bringing more than $21 billion. Each percent--a penny on a dollar purchase--raises about $4 billion a year.

Some lawmakers have balked at cutting the sales tax, believing that people won’t notice a quarter- or half-cent drop. Still, the sales tax is almost sure to be an issue in January when lawmakers return. Senate Republican leader Jim Brulte of Rancho Cucamonga was quick to call for a permanent cut in the sales tax. He also questioned Davis’ timing of the announcement.

“Clearly, the timing is suspect,” Brulte said. “I think he is trying to give a boost to Al Gore. But that’s OK, so long as Californians get money back.”

Noting that the volatility in the stock market could result in a slowing in the state’s economy, Davis said he had no plans to make the quarter-cent reduction permanent.

“I don’t want to get ahead of myself,” Davis said. “I don’t want to jump the gun on spending. I don’t want to jump the gun on tax relief.”

Senate President Pro Tem John Burton of San Francisco, who earlier this year supported a version of a sales tax cut, said the $1.1 billion would be better used to increase state-funded health care for poor people, mental health care services or aid to local government.

“Nobody is clamoring for a tax cut except for the do-nothing Republicans,” Burton said.

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Tax Savings

A quarter-cent sales tax cut announced Wednesday by Gov. Gray Davis will save Californians $1.1 billion a year, though individuals may not notice much. Here’s a look at the effect on a couple under age 65, depending on income:

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Income Avg. savings Less than $27,000 $21 $27,000-$47,000 $43 $47,000-$67,000 $53 $67,000-$97,000 $61 $97,000-$186,000 $70

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Source: California Budget Project, a private organization that tracks state tax policy and spending