Business analyst Mark Lacter joins KPCC once a week for an in-depth look at economic issues in Southern California.
Hosted by Steve Julian and Mark Lacter
Airs Tuesday mornings

Consumers increase spending in U.S.; taxes in California

KPCC's business analyst Mark Lacter says consumers in the U.S. are spending more money. He also discusses taxes in California.

Steve Julian: Mark, consumers seem to be spending, but why?

Mark Lacter: Well, they're spending because the economy is growing, Steve - jobs are being created and folks are making money. It's as simple as that. Now is this super-strong growth? No, but it's apparently enough for consumers to be reasonably confident - and that was borne out by the pretty solid increase in retail sales last month - even after you take money out for higher gas prices (and we also should mention that L.A. gas prices have fallen substantially in the first two weeks of April).

Julian: What's the word on the street?

Lacter: I've spoken to several retail brokers in the last week or two and they're all sounding upbeat - the vacancy rate for L.A. shopping centers is around 3 percent, and that compares with the first quarter of 2009 when it was close to 5 percent. A couple of percentage points might not seem like a big deal, but in the retail world it really is.

Julian: Why is that a big deal?

Lacter: It means that merchants are not afraid to cut lease deals. Now some of the spending is simply the result of pent-up demand for cars, appliances, even clothing – merchandise that consumers put off because of worries about the economy. One analyst calls it "frugality fatigue" and it's consumers who are just tired of not buying stuff. They're mostly middle- and upper-middle income folks who have a job, aren't having any big problems paying off their mortgage, and have been making some money in the stock market - what's known as the wealth effect. And this involves more than big-ticket purchases. The restaurant chain BJ's has seen higher sales of appetizers and drinks, which would indicate that people are splurging more than they used to.

Julian: And speaking of splurge, just look at the sales of Apple's latest iPad.

Lacter: That’s right. The question, of course, is whether this spending can be sustained - or to put it another way, whether consumers are going to get worried again if the stock market nosedives, or the economy takes a bad turn. And the answer is, of course they'll get worried. But so far, the indicators have been pretty positive.

Julian: Today is tax day. How do taxes factor into that spending?

Lacter: It really depends on how you do the measuring - and that's why the rankings can be so confusing. You can argue, for example, that poor people pay the most taxes, not because of income tax (they don't have to worry about that), but because of sales and excise taxes. Everybody pays out the same of percentage on those, no matter how rich or poor you are (your Macy's bill doesn't differentiate). So a household that makes a little under $13,000 would pay about 10 percent of that amount on state and local taxes. But if you're in the top tier, you'd only pay seven-and-a-half percent of your income.

Julian: They say that California's income taxes are the highest of any state.

Lacter: Well, they’re wrong. California ranks 15th, according to the California Budget Project. All these facts and figures set the stage for a possible ballot fight this fall over the raising of taxes. Gov. Brown is behind a measure that would raise income taxes on the very wealthy for the next five years as a way of avoiding huge cuts in education funding. The top 1 percent already pays 40 percent of the state income tax revenue, which means that California is hugely reliant on the very rich.

Julian: Which might work when the economy is strong...

Lacter: ... when those folks are making huge amounts of money, but it's a disaster during a downturn. Of course, there's another proposal on the table that would raise taxes for everyone making over $7,300 (though the wealthier would still have more of a burden). So which of the two do you think is doing better at the polls: The one where only the rich would face an increase in their income tax, or the one where most everybody would be taxed? Well, Brown's plan has 64 percent, according to a recent L.A. Times poll; the plan to tax everybody is supported by just 32 percent. Shows you how taxing only the rich can be such a powerful political argument, even if it might not make the most sense in the long run.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA