Higher taxes? In a recession?

From refrigerator repair to oil production, Gov. Arnold Schwarzenegger's budget plan launched an instant debate Thursday on the economic impact of increasing the tax burden on a weary populace.

Some analysts said raising taxes would hurt consumer spending when Californians are already scrimping and unemployment is at 7.7 percent. Higher taxes could also worsen California's anti-business reputation. A proposed tax on oil production would increase the state's reliance on foreign sources, some say.

But others said Schwarzenegger's plan has economic merit. Raising the sales tax wouldn't take money out of circulation, they argue; it would ensure money is spent on things like education and social services.

They said broadening the sales tax base to include services like car repair would stabilize California's notoriously volatile tax revenues, which are overly dependent on personal income taxes.

And they said Schwarzenegger's plan to accelerate hundreds of millions of dollars in already-approved public-works spending would help the construction industry.

Schwarzenegger called for a 1.5-point increase in the basic sales tax rate, to 8.75 percent, for three years. He would also extend the sales tax, for the first time, to appliance, furniture and motor-vehicle repair, as well as veterinary bills, amusement parks, sporting events and a round of golf.

"You could make the argument that it's the worst time in the world to be raising taxes, but on the other hand this budget deficit is growing daily," said Terri Sexton, a fiscal-policy expert at California State University, Sacramento. "The deficit's to the point where it just isn't realistic that we can cut spending enough."

The governor called for $4.5 billion in spending cuts but said he needed additional revenue to plug an estimated $11.2 billion deficit.

Sexton is one of a growing number of economists arguing for greater reliance on sales tax, on the grounds that it doesn't fluctuate nearly as much as income tax revenue.

The governor's plan exempted some major service industries, like law firms and accountants, but Sexton said Schwarzenegger may have been bowing to political reality. "Let's face it, the legal industry is a pretty vocal constituency," she said.

That was of little comfort to those industries facing sales tax for the first time, like appliance repair.

"Anytime you add an extra tax, especially in these times – businesses are slow right now," said Omar Mills, service manager at Zajic Appliance Sales & Service in Sacramento. "I'm not thrilled with increasing any taxes."

Steve Karn, who owns the Japanese Service Center auto repair shop in Sacramento, was also upset.

"This industry's already been hit really hard," he said. "People already don't have money."

Car dealers weren't happy, either. "A quarter percent, I can go along with – a point and a half is too much," said Vince Maita of Maita Automotive Group. "That's detrimental to car sales or any other big item."

Officials from the Sacramento Kings and River Cats said they couldn't comment on the proposal to tax sporting events until more details were available.

Yet Palo Alto economist Stephen Levy said higher taxes wouldn't cripple the economy as some fear. Instead of consumers spending the money, the state would put the dollars toward education and other services, he said.

"The money doesn't disappear from the economy," said Levy, director of the Center for Continuing Study of the California Economy. He also is in favor of Schwarzenegger's plan to speed up public-works spending.

But raising taxes might hurt California's ability to draw businesses from other states, or keep businesses from fleeing.

"The image (in California) is still one of a difficult business climate," said Jack Boyd, a corporate relocation consultant in Princeton, N.J.

Boyd said Schwarzenegger scored points with business by proposing to relax rules governing overtime pay, the 40-hour workweek and employee meal breaks – flexibility that California employers have been seeking for years.

For instance, restaurant owners say workers don't want to take a break during busy times because they'll lose tips. "We're forced as restaurant owners to require employees to take a break in many cases against their will," said Jot Condie of the California Restaurant Association.

The California Labor Federation pledged to fight the proposal, saying it would strip workers of their rights.

California's oil producers were furious with Schwarzenegger's proposed tax on production. California is the nation's third largest oil producer, behind Texas and Alaska, but has been wrestling with declining production volumes in recent years.

"It's just another nail in the coffin for California producers," said Fred Holmes, president of a small oil company southwest of Bakersfield.

Catherine Reheis-Boyd, chief operating officer of the Western States Petroleum Association, said the tax could raise energy prices and increase California's dependence on foreign oil. "You can't solve your budget crisis at the expense of your energy security," she said.

A similar tax was defeated by California voters in 2006.

Call The Bee's Dale Kasler, (916) 321-1066. Bee staff writer Darrell Smith contributed to this report.