California Hit Hard by Economic Woes

LOS ANGELES — California retailers were mixed last week on a proposed sales tax increase, but all agreed that the  economic condition of the Golden State is in the midst of a crisis.

Store owners shared varying opinions about the wisdom behind a sales tax hike, introduced last week. Some said that as  unpalatable as the increase may be, there are few alternatives to address the ailing California economy.

“The whole system is pretty much bankrupted,” said David Assil, co-owner of Los Angeles-based Madison. “They’ve got to raise money somehow. I don’t think they can wait for the economy to turn around. I don’t know how we’ve gotten to this point. I suppose it’s bad government across the board.”

Others, however, rejected the idea of a tax increase, saying the move would dissuade already-skittish consumers from shopping. “These are the worst times, and to give [consumers] another reason not to shop is ridiculous,” said Fred Segal Feet owner Stanley Silver. “[The tax increase] will put us in a further recession. [Consumers will] shop more online now.”

On Dec. 1, responding to a massive $11.2 billion state government shortfall, Gov. Arnold Schwarzenegger declared a
fi scal emergency, announcing that the state could become insolvent as soon as February if drastic measures aren’t undertaken. In addition to steep cuts in public services, the governor is also calling for a 1.5 percent hike in the sales tax, bringing the state sales tax to 8.75 percent. In cities and counties that levy sales, the increase could push the overall sales tax higher than 10 percent in places such as San Francisco and Oakland, Calif.

“Without immediate action, our state is heading for fiscal disaster,” Schwarzenegger said while announcing his plan.

The proposed increase in the sales tax is just the latest challenge for California, which many say has been particularly hard hit by the economic downturn.

“When the national economy does better, California tends to do better than the national average,” said Sportie LA co-owner Isack Fadlon. “But when things go down [nationally], California feels it more, too.”

Silver added, “People in New York and Texas say it’s not that bad for them, but we’re down 67 percent in November [compared with last November].”

To illustrate the dilemma, Silver said that on an average Saturday, his store rings up $14,000 to $30,000 in sales. Three weeks ago, the store tallied just $386.

“That’s not even enough to keep the doors open and pay rent,” said Silver. “I’m usually a very positive person, but things are not good right now,” he said. “No one is shopping, and everyone is on sale.”

In October, California’s unemployment rate climbed to 8.2 percent, from 7.7 percent in September, according to the Employment Development Department’s Labor Market Information Division. Nationally, the unemployment rate stood at 6.5 percent in October.

The state is also setting home foreclosure records. During the third quarter, 79,511 foreclosures were reported, a 25 percent increase over second-quarter figures, according to MDA DataQuick, a La Jolla, Calif.-based company that tracks the real estate market.

That figure is also three times higher than the number of foreclosures for the same period of 2007. Meanwhile, home values continue to decline. According to MDA DataQuick, the median home price in October fell to $278,000, down 34 percent from $424,000 a year ago.

These numbers have already translated into very real losses at retail. Sherman Oaks, Calif.-based Shoe Pavilion said in October it would shutter all its 64 stores. The Mervyns’ department store chain, based in Hayward, Calif., also announced in October it would cease operation of its 149 stores after the holidays.

According to a survey conducted by the Public Policy Institute of California in October, nearly three-quarters of those polled said the state was in for hard times during the coming year. Almost 80 percent said the state was in a mild to serious recession. But that acknowledgment might actually yield positive results, said Fadlon. Now that economists and consumers agree that a recession is afoot, steps can be taken to recover.

“The fact that we’re just hearing that we’ve been in a recession for a year now is pretty silly,” he said. “We’ve been feeling it for a while. The quicker you acknowledge it, the quicker people will do something about it.”

Fadlon said he’s more upbeat than most and expects to see a California rebound by the second quarter of 2009. “Is that optimistic? Yes, of course it is,” he said. “But we’ve been in this for a long time, and it eventually has to end.”

Madison’s Assil, however, was more cautious. “I’m quite concerned about 2009, 2010 and 2011,” he said. “I don’t know how we’re going to reverse this. We’ll have to see what happens. January is going to be a telling month.”

Silver, too, said a recovery is unlikely in the near future. “It’s going to be a long time before it turns around — 18 months, at least,” he said.

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