Treading Water
Sep 1, 2008 12:00 PM, By Jennifer Popovec
Weakening consumer spending
Beyond income and property taxes, the biggest decline in the state's revenues comes from shrinking consumer spending. Even consumers who still have jobs and the ability to pay their bills are spending less. “For a lot of Californians, their decision to spend less is completely psychological,” says Mark Schurgin, president of the Festival Cos., a Los Angeles-based shopping center owner and developer. “They don't feel confident enough to spend money, so they're saving it.”
While there are no statistics for retail sales in the state, it does monitor sales taxes. Looking at those numbers a drop is apparent. Sales tax receipts for the state were $81 million below the expected $2.04 billion estimate for July, according to the California Department of Finance. Year to date, sales and use tax receipts are down more than 4 percent.
Festival is closely monitoring its retailers' monthly sales figures looking for any signs of weakness. A recent company report shows sales are off 5 percent to 8 percent and the decline is most severe at its suburban properties in the Inland Empire and the Central Valley.
Nevertheless, many retailers are still expanding in the state. “I think most of them see California as a bright spot with good strong population growth and intrinsic disposable income,” says Steve Cutter, president of Lockehouse Retail Group Inc., a Burlingame, Calif.-based brokerage firm.
Weingarten Realty Investors however, has experienced a growing number of requests from retailers for rent reductions or early lease terminations, says Neil Soskin, vice president and director of leasing for the REIT's western region. Occupancy at the Houston-based company's California portfolio of more than 25 properties comprising four million square feet, is 95 percent today; down one percent from a year ago.
With a half dozen projects on its plate, Weingarten is expected to take a break from development and work on leasing its existing centers. Also taking a more reserved approach to development is Portfolio Development Partners. “We are approaching deals the way we used to — we're now doing all the work up front including the entitlements, leasing and financing before we buy the land,” Neustadt says.
The solution
In the past, California's lawmakers have tried to solve the state's budget deficits by cutting expenses. That strategy might not work this time around, says the California Budget Project, a nonprofit organization that provides expertise on state fiscal and economic policy issues.
A recent report by the organization says every dollar the state cuts in spending reduces consumption by the same amount. The dollar-for-dollar reduction occurs because state spending cuts disproportionately impact lower-income Californians, who typically spend all their income.
A better solution, economists say, is for California to find additional sources of revenue, which usually means increasing taxes. Most states would choose to increase property taxes, but that's not really an option in California because of Proposition 13, which limits taxes on both commercial and residential property. Some lawmakers have suggested exempting commercial property from Prop 13 but that does not have strong support.
Instead, there has been talk of raising taxes. A Democratic Party-backed budget plan, voted down last month, included $6.6 billion in increases. It would have boosted the income tax rate for families earning more than $321,000 to 10 percent from 9 percent, and for those earning more than $642,000 to 11 percent from 10 percent. The proposal also would have raised the corporate income tax rate to 9.30 percent from 8.84 percent.
In the interim, Schwarzenegger has proposed a temporary one-cent sales tax increase to be assessed in 2009. It hasn't received much support, says Griffiths, since those taxes fall disproportionately on low-income residents.
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