.New Tax Threatens Oakland’s Small Businesses

A proposal by mayoral candidate Don Perata would give the city the highest sales tax rate in Northern California.

Oakland retailers have shown signs of rebounding from the Great Recession in the past several months, particularly small, independent businesses. The local restaurant industry also is flourishing. About 25 new eateries have opened in the city in the past eighteen months. But a proposal being pushed by Oakland mayoral candidate Don Perata could threaten the turnaround. It would raise the city’s sales tax by one-half a percentage point, giving Oakland the highest sales tax rate in Northern California at 10.25 percent.

Perata has proposed the tax hike as way to help balance the city’s budget and avoid laying off more police officers. The Oakland City Council voted last week to lay off eighty cops after the police union refused to contribute to its pension plan like other city employee unions. A sales tax increase is projected to raise up to $16 million a year, and the ex-state senator is proposing it be put before voters as a mail-in ballot measure in September or as a regular measure in November.

But many retailers and city business leaders are already lining up in opposition to raising sales taxes. They say it could wreck the fragile economic turnaround, and pull the plug on small businesses that have not yet begun to recover. “It’s really, really distressing,” said Amy Thomas, owner of Pendragon Books on College Avenue. “It’s so ill-conceived. To not understand what kind of problems this will create is unconscionable”

Randy Reed, co-owner of Reed Brothers Security on Telegraph Avenue, agrees. “We’ve really worked hard convincing people that it’s okay to shop Oakland,” Reed said. “This sends the wrong message. I think it’s a mistake.”

In an interview, Larry Tramutola, Perata’s campaign manager, contended that there is no evidence that raising the sales tax will harm local businesses. “There is no proof of that at all,” he said. He also noted that raising the sales tax only requires a majority vote, while a parcel tax favored by some city officials would need a two-thirds vote to pass. “A parcel tax is dead in the water,” he said.

Currently, California’s basic sales tax rate is 8.25 percent. State law allows municipalities to charge up to 2 percentage points above the basic rate, according to the California Board of Equalization, the state’s taxing agency. At 9.75 percent, Oakland already has the highest sales tax rate in Northern California. But it’s the same rate charged by all other cities in the county — including Alameda, Berkeley, Emeryville, Hayward, and San Leandro. Perata’s proposal, however, would push Oakland’s rate to 10.25 percent — higher than every other city in the Bay Area.

There is a chance that state lawmakers will allow a 1 percentage point sales tax hike implemented in April 2009 to lapse next summer. The basic state rate would then return to 7.25 percent, meaning Perata’s proposal would put Oakland’s tax rate at 9.25 percent — lower than the current rate, but still higher than all other cities in Northern California.

Tramutola argues that because of the anti-tax fervor statewide, Sacramento lawmakers will allow the 1 percentage point sales tax hike to sunset. And he contends that, as a result, other Bay Area municipalities will likely raise their sales tax rates as well. “Other cities are going to do it, if Oakland doesn’t do it,” he said.

But Oakland City Administrator Dan Lindheim said it’s not clear what’s going to happen in Sacramento. He also is concerned that other cities might capitalize on Oakland’s higher sales tax rate. “If we’re at 10 and nobody else is at 10, then I can see all kinds of campaigns by people outside of the Oakland, saying ‘Come shop with us. Our sales taxes are lower.'”

Lindheim said that besides a parcel tax, city officials are seriously looking at increasing other tax rates, including the utility tax, because they are currently lower than other Bay Area jurisdictions. Raising the city tax rates on telephones, water, and garbage could generate as much money as hiking the sales tax by one-half percentage point, he said.

Moreover, higher utility taxes would not impact small, local businesses like a sales tax potentially could. And they’re less likely to harm Oakland city revenues overall, while a higher sales tax could dampen proceeds if it prompts consumers to shop in other cities or online. Lindheim, in fact, questions whether having the highest sales tax rate in the region would generate as much money as Perata hopes.

In addition, sales taxes are generally considered more regressive. That’s because low- and middle-income families typically spend a higher percentage of their money on things that are subject to sales taxes, such as food and clothing.

Utility taxes also would only require a majority vote to pass — as long as the city doesn’t promise to spend the revenues on police. However, the same is true of a sales tax increase. If the city was to tell voters that it’s for public safety, then it also would require a two-thirds supermajority to pass. But the reality is that a large portion of any tax increase, regardless of what is promised to voters, would go to public safety, since 75 percent of Oakland’s general fund budget goes to police and fire.


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