Soapbox

Taxing services would kill jobs and damage small firms

Sen. Bob Hertzberg, D-Los Angeles, left, talks with Sen. Connie Leyva, D-Chino, at the Capitol in April. A former Assembly speaker, Hertzberg has returned after a 12-year hiatus with an aggressive agenda, starting with an ambitious tax overhaul that includes taxing services.
Sen. Bob Hertzberg, D-Los Angeles, left, talks with Sen. Connie Leyva, D-Chino, at the Capitol in April. A former Assembly speaker, Hertzberg has returned after a 12-year hiatus with an aggressive agenda, starting with an ambitious tax overhaul that includes taxing services. The Associated Press

Every dollar earned in California seems to inspire a new mechanism to turn it into tax revenue.

Calls for higher taxes this year have targeted sodas, insurance and energy, as well as income, and property – some with remarkable inventiveness, but few with any grasp of how the new tax would affect California’s economy and jobs.

Most recently, a group of “pro-growth progressives” lauded state Sen. Bob Hertzberg’s proposal to extend sales taxes to services.

While the state sales tax is currently limited to tangible products, Hertzberg’s proposal would extend it to services such as child care, transportation or haircuts. Its legislative vehicle, Senate Bill 8, currently lacks much detail or explanation. But given the measure says it will raise at least $10 billion in new tax revenue every year, it would likely cast a wide net.

Proponents are calling it innovative despite numerous studies showing a tax on services would eliminate jobs by stacking the odds against small businesses. Because small businesses rely more frequently upon outside services for accounting or legal help, they would have to pay the tax more frequently than larger businesses, which have accountants and lawyers on staff. That would put small businesses at an economic disadvantage.

Additionally, an analysis by the state Board of Equalization found the service tax would require about 2.5 million businesses to newly register to pay the state sales tax, most of them small firms. “The financial impact on service providers who would be required to register and report sales cannot be minimized,” says the board’s report, emphasizing the “significant hardship” it would impose on small business.

Faced with these impacts, Hertzberg says businesses with less than $100,000 in annual gross revenue would be exempt from the new tax. But that group is an infinitesimal fraction of the small business community, which would be saddled by yet another burden.

Small businesses employ about 8.7 million workers – half of California’s total workforce – whose jobs would be placed in jeopardy by a service tax.

But perhaps SB 8 is being called innovative because it also suggests lowering income taxes to compensate for the increase in sales taxes. Proponents of the measure call this “tax reform” or “modernization” necessary to stabilize the government’s revenue stream.

It’s a clever gimmick, but the simple fact that the measure also spends $10 billion in new tax revenue every year shows it is not reforming taxes – it’s increasing them.

Also, a call for $10 billion in new taxes would suggest the state government is hurting for money. But in fact the opposite is true. The state is already enjoying surplus revenues and record spending. With current tax rates, this year the Legislature enacted the largest spending plan in California history. The 2015-16 budget increased spending on K-12 education, paid down long-term debt, created new spending programs for the poor and even put $2 billion away in a “rainy day” fund.

Even after all that spending, the state will still end its fiscal year with a $7.9 billion surplus, according to the latest report by the Legislative Analyst’s Office. The report also predicts those budget surpluses will continue, depositing an excess $11.5 billion in the state’s coffers by June 2017.

Is it worth placing additional tax burdens on California’s families, workers and small businesses, just so the state can run up an even greater surplus?

As the politicians keep concocting new tax schemes, it’s important to remind them that the consequences of tax policies extend beyond the ledger of Sacramento’s state treasury. They impact jobs and the economy as well.

Tom Scott is California state director for the National Federation of Independent Business. He can be contacted at Tom.Scott@nfib.org.

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