Looming over the 405 Freeway near Culver City, a 50-foot-tall electronic sign for Airport Marina Ford has flashed “buy now” in bright red letters for the last month, a reminder to passing motorists to beat the April 1 sales tax increase.
“The clock is ticking,” said Dan Theroux, general manager of the car dealership. “If you’re buying a new car, it’s going to save you hundreds of dollars to buy before the end of the month.”
With the statewide sales tax set to rise 1 cent on every dollar next Wednesday, retailers are gearing up for a huge sales weekend. Car dealers have launched a full-on advertising blitz and store associates are urging indecisive customers to take advantage of current prices.
But a strong end of the month could be replaced by even tighter consumer spending once the tax hike kicks in. Although the increase is relatively small, retailers worry it could deliver yet another blow to the battered sales business, especially for merchants who peddle big-ticket items such as cars, furniture and electronics.
“Anything that’s going to make it tougher for us to sell cars, we’re not happy about,” Theroux said. “We recognize that it’s a necessary evil but at this stage in the game, it’s just making things more challenging because it’s adding cost to the car that’s being passed on to the consumer.”
For stores that have seen sales slump in recent months as consumers limit their discretionary spending, the increased tax could cripple business even further.
“It’s like putting another nail in the coffin, it really is,” said Ivy Fradin, owner of PJs Sleep Co., a furniture and mattress store in the Fairfax District. “The government tells you to spend and gives you money, but when you go out and spend, we’re going to charge you more.”
The temporary 1-percentage-point tax increase will expire on July 1, 2011, or July 1, 2012, depending on whether voters approve Proposition 1A, also known as the Budget Stabilization Act, in a statewide election May 19. As of Wednesday, the sales tax will range from 8.25% to 10.25% depending on additional local taxes.
Also part of the budget-balancing package approved by lawmakers in February was a boost in vehicle license fees starting in May.
The sales tax hike is expected to bring added revenue to the state, but with the economy deep in a recession and consumers reluctant to spend, the move could be less effective than planned, said economist Sung Won Sohn, a professor at Cal State Channel Islands.
“The sales tax increase that the state envisions will not be as high as it is because sales will be lower than they think,” he said. “Today, people are super price-sensitive and now the price has gone up while your income is falling and jobs are disappearing. It’s not the best time to have an increase in the sales tax even though we understand why.”
At Los Angeles furniture chain Pampa, owner Dolores Caffaro said she and her employees would aggressively push sales this weekend. After April 1, her three-store chain will sacrifice profits rather than lose customers to the higher tax, she said.
“I’m not going to let sales go,” she said. “I will give an additional 1% discount to people if I have to.”
Some retailers are spending money from already tight advertising budgets to persuade customers to buy before the end of the month.
South Coast Toyota, for instance, sent out 20,000 mail reminders to customers telling them to buy this weekend to beat the increase. General Sales Manager Brian O’Donnell said the ads helped sell 11 cars Wednesday, up from the four or five the dealer normally sells daily.
“People like to save every bit they can now,” he said.
Craig Feltman, chief executive of ad agency Feltman & Associates, said he did radio ads for Irvine BMW encouraging prospective buyers to “beat the tax increase” by purchasing before April. With a $70,000 vehicle, he said, 1% is still a lot of money.
“If they’re on the fence and can save an extra $1,000, why not do it,” he said.
In Northern California, a loosely affiliated group of car dealers persuaded agency Hoffman/Lewis to create a pro bono ad encouraging people to buy a car now. They also negotiated free airtime on 60 radio stations, which all agreed to run four spots a day.
The ad lists five reasons to buy a new car now. Number four? Save money before California state sales tax goes up.
“It’s guaranteed savings,” said Sharon Krinsky, president of Hoffman/Lewis. “There’s so much bad news right now. Any good news, we ought to grab it.”
But aggressive advertising could backfire, said Mike Wolfsohn, executive creative director of El Segundo ad agency Ignited.
“It’s a double-edged sword,” he said. “It could just increase people’s reticence to buy in this economy by focusing on the fact that prices are going to go up.”