California Forum

California may need tax reform, but Hertzberg’s sales tax on services isn’t it

Tax preparers work on deadline at a Sacramento H&R Block office. A proposed tax reform would impose a sales tax on accounting, advertising and other services.
Tax preparers work on deadline at a Sacramento H&R Block office. A proposed tax reform would impose a sales tax on accounting, advertising and other services. Sacramento Bee Staff Photo

Lawmakers in Sacramento just passed a state budget of nearly $200 billion in taxpayer dollars – the largest in state history. Thanks to an economy that is roaring for a few select sectors, California anticipates a surplus of $8.9 billion.

Despite all this, one lawmaker is fixated on imposing a completely new, unprecedented tax – a 3 percent sales tax on services purchased by California businesses.

This is a lousy idea. Businesses that purchase the services covered by the bill – advertising, legal services, accounting, banking and more – will be forced to pass the cost of the tax on to businesses and consumers. This, in turn, will increase the price of any good or service offered by a business that uses these services – in short, nearly every business in the state, and therefore nearly anything we buy.

Businesses that purchase the services covered by the bill – advertising, legal services, accounting, banking and more – will be forced to pass the cost of the tax on to businesses and consumers. This, in turn, will increase the price of almost all goods and services.

The author of Senate Bill 993, Sen. Bob Hertzberg, D-Van Nuys, has tried to provide what politicians call a “sweetener” to relieve concerns that this is another Sacramento tax grab. In this case, the sweetener would reduce the sales tax on goods by a commensurate amount to the revenue raised by the new tax.

But it’s just taxpayers paying money out of one pocket instead of another. The sweetener is really a placebo designed to lull voters into a sense they’re getting a deal, when they’re not.

Small businesses would be disproportionately impacted under SB 993. The bill adds another layer of costly bureaucratic requirements, including registering with the state, determining what portion of services fall under the bill’s confusing requirements and submitting a security to the state as collateral against their future tax collection.

Larger corporations can simply bring the impacted services in house, avoiding some of these added costs. Small businesses don’t have that luxury – they’ll have to purchase these services, putting them at a disadvantage against larger competitors that can avoid the added cost.

Ironically, complying with this complex new law will force many small businesses to seek outside help from many of the services that would be taxed. And just imagine all the new state employees the tax agencies will have to hire to implement and enforce all these requirements.

But, the immediate harms caused by this bill aren’t the full story. The author’s real long-term goal is to dramatically expand the state’s sales tax to all services, raising billions of dollars, as did the bill he introduced in the last legislative session. He hopes this “revenue-neutral” proposal will provide a foothold for his idea, which he can then dramatically expand down the road.

Bottom line, at a time of record-breaking budgets and multi-billion-dollar surpluses, California doesn’t need more tax revenue. This bill would hurt consumers and small businesses, without solving a single problem facing our state. California very well may need tax reform to modernize our tax system, but this isn’t it.

John Kabateck is California State Director of the National Federation of Independent Business. Reach him at john@kabstrat.com.

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