Wider, not higher, sales tax seen as budget fix

Californians are used to paying as much as 8.75 percent sales tax on automobiles, athletic shoes and widescreen televisions.

But what about applying the same rate to carwashes, pedicures and movie tickets?

As the state budget gap widens, talk again has turned to the sales tax – not raising the rate, but the possibility of applying it to a range of services that other states tax routinely.

Last week, the Democratic chair of the Board of Equalization, Judy Chu, sent a letter to legislative leaders suggesting that broadening the sales tax to some services often taxed outside California could net $2.7 billion for the ailing state budget.

California could practically wipe out next year's projected deficit of $10 billion if it adopted policies similar to those in New York, Texas and Florida, Chu wrote.

"I think everything has to be on the table," said Assemblyman John Laird, D-Santa Cruz, chair of the Assembly Budget Committee. "And we hope everybody looks at every conceivable option."

Senate President Pro Tem Don Perata has suggested imposing the sales tax on services for things such as consultants, dry cleaners, lawyers and technology support.

But while Perata and Assembly Speaker Fabian Núñez push for new revenues, they continue to face resistance from Republican lawmakers and taxpayer advocates.

"We're opposing all tax increases as unnecessary," said Jon Coupal, president of the Howard Jarvis Taxpayers Association. "Businesses and families live within their means. It's time to have the state do the same."

Some Republicans, including Gov. Arnold Schwarzenegger, are open to the idea, but as a way to make the tax system more fair, not necessarily to raise more money.

Harley Duncan, executive director of the Federation of Tax Administrators, said over time, many states have expanded their sales tax to include admissions for concerts, sporting events and movies. Others have turned to taxing services on tangible goods, such as auto repair, plumbing, and painting.

New York taxes baseball tickets to Yankees games, Pennsylvania taxes car repair services, and Texas taxes membership fees at health clubs.

According to Duncan's group, 37 states tax professional sporting events, 22 states tax repair services on motor vehicles, and 21 states tax health club dues.

Other popular services taxed by other states include landscaping, diaper services and taxidermy.

In fact, three states – South Dakota, Hawaii and New Mexico – have moved to a broad system that taxes all goods and services.

California hasn't tinkered with its tax code since the sales and use taxes were created in the 1930s to offset declining property tax revenues as a result of the Depression. Today, the tax continues to focus on the sale of physical goods, such as clothing, furniture and automobiles.

Chu said broadening the sales tax makes the most sense because it's a more stable source of revenue than the income tax, which varies widely with the stock earnings of the state's high-income earners.

She suggested change would also bring consistency to existing tax policies.

"We tax exercise equipment, but we don't tax health club services. We tax movie rentals, but we don't tax movie admissions," Chu said.

The idea of a broader sales tax isn't popular just with Democrats. It also appeals to some conservative thinkers.

In general, items or services bought by a household should be taxed, with some exceptions like doctor's office visits, said Charles McLure, an economist who worked in the Treasury Department under the Reagan administration and now is a senior fellow at the Hoover Institute at Stanford University.

"Obviously as the economy has evolved, the portion of what people buy and consume has changed. The tax base has shrunk," McLure said. "To restore sanity to the tax base, it should be expanded to everything the consumer consumes."

Assemblyman Roger Niello, R-Fair Oaks, agreed the state should review its tax structure as a way of stabilizing revenues – but he said any policy change to the sales tax should be accompanied by a lower rate to make it revenue-neutral.

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• Call Judy Lin, Bee Capitol Bureau, (916) 321-1115.