What Price Hike? : Past Increases in O.C. Sales Tax Didn’t Hurt Retailers

There’s likely to be a pitched political battle over a proposed half-cent increase in Orange County’s retail sales tax, but if it is approved, there probably won’t be much impact on retail spending in the financially strapped county.

County supervisors, seeking to increase revenue by as much as $150 million a year, voted early Wednesday morning to let voters decide on the increase in June--to the dismay of anti-tax groups and retailers who say their businesses will suffer if they have to raise prices.

But a review of sales tax increases in Orange County since the uniform local sales tax law took effect in 1962 with a 4% rate shows that sales tax hikes don’t have nearly the impact on spending as do other economic factors.

Economists--and even some business owners--say it takes more than sales tax hikes to clamp down on family spending habits.

“A basic principal of economics is that as prices go up, consumption goes down,” said Anil Puri, head of the economics department at Cal State Fullerton. “But there’s a real question about how much impact a 0.5% increase would have. There might be some on big-ticket items, but I don’t believe it has much direct bearing on retail sales.”

Indeed, while sales taxes have risen six times in Orange County since 1962, taxable sales in the county continued to rise much faster than the statewide average through the first three increases, slowing only since the local economy hit the skids in 1989.

In 1967, when sales taxes rose to 5 cents on the dollar, taxable sales statewide increased only 0.1% when adjusted for inflation. In booming Orange County, however, the extra penny per dollar did nothing to cool a scorching business climate and retail sales jumped at a real, or inflation-adjusted, rate of 7.1%.

Just six years later, in the midst of one of California’s greatest growth periods, the rate rose again, to 6%, and cash registers elsewhere in the state were ringing as retailers enjoyed an 8.5% taxable sales hike after adjusting for a 6% inflation rate. In Orange County, the registers didn’t just ring--they roared. Taxable sales were up 13.3% as the population grew and consumers ignored the slightly higher cost of goods.

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It has only been in the recent inflation years--things started souring in Orange County when the housing boom collapsed in 1989--that the county’s retail sales record has been worse than the statewide average.

There have been three sales tax hikes since 1989, pushing the rate in Orange County to its present 7.75%, but recession-caused layoffs and reductions in families’ incomes have had far more impact on taxable sales, said Bruce DeVine, economist for the Southern California Assn. of Governments.

In 1991, when county voters approved a half-cent transportation tax and then were hit with a 1.25-cent state sales tax increase just three months later, retail spending in the county declined by 8.4%, slightly more than the 7.7% drop recorded statewide.

But how much of the drop was caused by the tax situation “is really difficult to determine,” said economist Puri.

Aileen Lee, research manager for the State Board of Equalization, tracks taxable sales data throughout the state. She said spending “doesn’t stop” when sales taxes go up. “We see some behavior changes, because if people know that the tax is going to go up next month and they are planning big purchases, like a car, they might buy now in order to pay less tax, but they are still making the purchase,” Lee said.

Tom Takahashi, sales manager at Showcase Chevrolet/Geo in Westminster, agrees. He said he’s been selling cars for 35 years and has never head of a sales tax increase affecting a sale.

“Car buyers balk when the price isn’t right, or the dealer doesn’t have their favorite color in stock. But sales tax hikes aren’t typically deal-killers,” he said. “Of course, eventually you get to the point where you say, ‘Wait a minute.’ But right now, (the proposed tax hike) is a necessary evil.”

Karen Raab, manager of Chemers Gallery in Tustin, also sells things people use discretionary income to buy. The average purchaser spends $1,500 in her fine art and custom framing store, she said, and in her 17 years in business, she has never seen sales tax increases affect a sale.

The proposed half-cent tax increase in Orange County is particularly frightening to many because it comes at a time when the economy is still staggering from the impact of a recession that lasted longer and cut deeper than any other since World War II and has been followed by an anemic recovery that only the economists seem able to measure.

“It affects the psychology of customers, just like when the county declared bankruptcy,” said David Neishabori, owner of Kismet Rug Gallery in Corona del Mar. “Psychologically, that put everyone in jeopardy. And (cuts in personal spending) start with the things that are not necessities of life.”

Neishabori was hard-pressed to point to a sale he’s lost because of a sales tax increase, but is adamant that business has suffered every time the state or county has raised the rate.

“When you’re talking about a $10,000 item, and you add one-half percent, that’s terrible news,” he said.

Actually, it’s $50, about the amount economists figure a half-cent sales tax increase would cost the average Orange County household each year.

DeVine, the government association economist, says that if past performance is any indication, “that money will come out of people’s savings, but they won’t stop spending.”

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Times staff writer Greg Johnson contributed to this story.

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Do Sales Taxes Affect Spending?

Economists say sales tax hikes have little impact on people’s spending habits. Layoffs, recession and economic uncertainty are more likely to curb all but necessary shopping. As the chart below shows, per capita spending in Orange County has risen despite sales tax increases--except in the recent recession years.

Per capita spending adjusted for inflation

January, 1962: 4.0% Original uniform state and local sales tax August, 1967: 5.0% State sales tax increase July, 1973: 6.0% State sales tax increase October, 1973: 5.0% State sales tax decrease during economic boom April, 1974: 6.0% State returns to higher sales tax December, 1989: 6.25% Earthquake recovery tax added January, 1991: 6.0% Earthquake recovery tax removed April, 1991: 6.5% Orange County transportation tax July, 1991: 7.75% State sales tax increase

Source: State Department of Finance, State Board of Equalization; Researched by JOHN O’DELL and JANICE L. JONES / Los Angeles Times