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Taxing buyers' patience

Word the governor is considering levies on services and takeout has consumers crying in their cappuccino.

May 03, 2008|Tami Abdollah and Evan Halper | Times Staff Writers
  • Arnold Schwarzenegger, governor of California, right, speaks during the Milken Institute Global Conference 2008 in Los Angeles, on Wednesday, April 30, 2008.  Schwarzenegger's administration is exploring potential tax hikes on personal services, some prepared foods and other items to help close a budget gap was not warmly received by consumers and business owners Friday.
Arnold Schwarzenegger, governor of California, right, speaks during… (Jamie Rector / Bloomberg…)

Other states tax takeout cappuccino, movie tickets and personal trainer sessions. Why not California?

A woman looking for the cheapest jolt of caffeine on the menu at an Alhambra Starbucks offered one response: She's already broke.

"There must be some other way," said Gwen Angert, 38, a student at the California School of Professional Psychology who says she and her classmates have up to $80,000 in education debt. "We're struggling to make ends meet."

Her friend Chris Fyfe, 25, chimed in: "I don't know if people will continue buying things if prices go up."

News that Gov. Arnold Schwarzenegger's administration is exploring potential tax hikes on personal services, some prepared foods and other items to help close a budget gap was not warmly received by consumers and business owners Friday.

A coffee shop owner in Koreatown fretted that such a tax could help push her out of business. A personal trainer in West L.A. wondered if it would make customers think twice about going to work out. Movie patrons at the Grove complained that tickets cost too much already.

But one group -- economists -- is fond of the idea. They have long urged the state to tax services, saying there is little rationale to California's current tax system, a crazy-quilt of levies that they say encourages consumers to spend money in some places and not others.

"There is no reason to exclude services from sales tax," said Alan Auerbach, a professor of economics at UC Berkeley. "It discourages people from buying goods in favor of services."

Auerbach, like other economists, says state officials should tinker with the tax code to bring fairness to it, not just to squeeze more money out of it. He suggested they might even cut a tax when they impose new ones -- something that is not in the cards in cash-strapped Sacramento.

The ideas being studied by the administration are geared toward closing a budget gap that the governor says has now grown as large as $20 billion -- while the economy goes south and tax receipts dwindle. The hunt for potential tax hikes is occurring even as the governor has continued to say publicly that he will resist them and his staff denied Friday that they were considering new taxes.

Schwarzenegger has to put out a revised budget plan May 14. Lobbyists and state officials have been told by his staff that if the deficit has grown considerably by then, the governor is prepared to consider a tax increase. The administration appears to be targeting items that now escape taxation.

Food has traditionally been exempt from the sales tax because it is a necessity and adding to the cost of it would hit the poor particularly hard. So the state taxes food consumed at a restaurant and not food taken out, presumably to be consumed at home.

But economists question whether a mochaccino is a necessity. Same with an artisan goat cheese pizza purchased at a gourmet food shop.

One proposal the administration is exploring would lift the tax exemption on such takeout foods, raising as much as $750 million. Steven Sheffrin, a professor of economics at UC Davis, says that may be easier said than done; the question is where to draw the line.

He cites an old tax rule in New York that classified doughnuts as tax-exempt only if they were beyond a certain size. Tax officials presumed that at that point, they were too large to consume in one sitting in a restaurant.

Jessica Cho, owner of Coffee & U in Koreatown, is less concerned with bringing fairness to the tax code than with keeping her shop open. She says taxing takeout beverages is a lousy idea.

"The economy is bad," she said Friday afternoon in her cafe, whose brown suede lounge chairs sat empty.

"My business is very, very slow, and there's already too many taxes -- sales tax, business tax, taxes everywhere. I may give up my store."

Cho said that since she opened in January, many other stores have closed in the area and her business has lost about $4,000 each month. Next month, she may shutter the place. "It's a bad idea," she said of the tax.

At the Grove, movie patrons expressed shock at the thought of ticket prices rising.

"For people who don't have very much money, it is a luxury to come to a cinema," said Frankie Gillard, 43, a production manager from West Hollywood, as she exited a showing of "Iron Man." "To tax it is insane. They should raise the taxes on people who are the most wealthy, not the people who make less than $50,000."

Giuseppe Restreppo, 20, who works at the theater's customer service counter, expressed dismay that prices could go up.

Still, Restreppo said he's amazed at how many people go to the movies at already high prices -- as much as $12.75 on Saturday night.

"We still have thousands of people come here," he said. "I don't think it will matter."

In West L.A., personal trainer Jennifer Matthews, 29, said that adding to the cost of sessions could affect her business.

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