California Gov. Arnold Schwarzenegger recently asked the state legislature to convene a special session and approve his plan for a one-and-a-half percent sales tax increase.
Schwarzenegger said the Wall Street meltdown could reduce California's capital gains tax by as much as $4 billion, and additional funding from the increased tax is necessary.
The sales tax would generate an estimated $3.5 billion and revert to its current level after three years.
"We are living in a different world now," Schwarzenegger said at a Sacramento, Calif., press conference. "We have a dramatic situation, and it takes dramatic solutions."
Another $357 million would be generated by broadening the sales tax to include certain services such as appliance and furniture repair, vehicle repair and maintenance, and veterinary services.
Schwarzenegger's plan also calls for new levies on alcohol and cuts in state services and education to curb a budget deficit that is expected to reach $24 billion by mid-2010.
"In the grand scheme of things, if you look at where the economy is right now, with retail prices and the performance of real estate and mutual funds, do you think a percentage point or so on sales tax is a big deal?" asked Theodore Svoronos, Payments Consultant for Irvine, Calif.-based Group ISO.
"Anytime there is legislation that comes down the pipe related to finance, we always look at it. But eventually, the market takes it into account, and we find a way to work around it."
Isaac Lay, co-founder and Chief Executive Officer of payment processor AllEtronic Inc., sees the proposed tax increase as nominal. "If it was 4 or 5 percent, I think you'd see a lot of consumers freak out and hang onto their money, but I really don't see this as being that big of a problem in terms of how consumers spend their money," he said.
"Historically, in my opinion, the payments industry has always been strong regardless of the economic ups and downs."
Svoronos believes successful ISOs take these market considerations into account and adjust to merchants accordingly. "Maybe it would behoove the [payments] industry in and of itself to adjust rates to assist the merchants and the consumers," Svoronos said.
"That is one thing that we can do to not only roll with the market's punches, but to give back to our clients as well."
Paul Martaus, President of the Martaus & Associates consultancy, said the broadening of the sales tax to cover the aforementioned retail sectors is no coincidence. "Number one, the areas that [Schwarzenegger] is targeting are what I consider essential services," Martaus said.
"So irrespective of consumers' needs and desires, if you target essential services, people have no choice but to buy them." But the sales tax, he said, is not the real issue.
"On the other side of the coin you've got millions of consumers being foreclosed, have mortgage conditions that are less than satisfactory or are having their jobs cut," Martaus added. "Each of these separate but interrelated factors puts consumers further behind the eight ball.
"Now, what a lot of the brighter consumers will do is start turning to their credit cards to bridge the gap."
Svoronos said that with the devalued dollar and the dearth of cash, people will continue to use credit cards. He said the card industry continues to flourish, and that "even under the tight rein of PCI compliance" credit and debit card usage is still up.
"People today have little or no cushion for retirement, and when the Dow went under 9,000, people panicked and sold portfolios left, right and center," Svoronos said.
"They've lost that cushion, so you think they're going to give up the spare cash they do have? No, they're going to load up on credit cards."
Martaus said that ISOs must focus on merchant retention, and merchant level salespeople need to hone their closing abilities. "What we're finding is that the ISOs who went out and got the paper every week to find new merchant formations are not able to do that," Martaus said.
"They need to focus on retention plus sharpening their closing skills.
"We are in what everyone recognizes now as a zero sum game. There are very few new merchants I can go after anymore, so I have to concentrate on signing the existing pool of clients."
Lay added that one of the most important areas of focus for the payments industry right now should be merchant solvency. "In my 10 years, there is one word that scares us all, and that's attrition," Lay said.
"If you can take care of your customers and provide them with service to a point where they know they can call you and get the help they need from an agent who is nice as well as patient - these are the things that really separate one company from another today."
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