A broad coalition that includes the California Chamber of Commerce, small businesses, and taxpayers this week announced the formation of the California Tax and Budget Research Project (CTBRP).
The project will educate Californians about the harmful impacts that imposing a new sales tax on services will have on the state’s economy, budget, consumers and taxpayers.
In the past, state legislators have attempted to pass a sales tax on services—such as those provided by a plumber or a lawyer—without success. Talk of imposing a sales tax on services has been growing again recently.
Although supporters claim it will stabilize the state’s fluctuations in tax revenue, a sales tax on services will actually drive up costs of housing, infrastructure and everyday services.
“If the problem is budget volatility, then a sales tax on services is not the solution, no matter how it’s structured,” said CalChamber President and CEO Allan Zaremberg. “Once you strip away this pretense, you see that a new services tax is just another tax that will simply make services more unaffordable for all Californians.”
Increases Costs for Consumers, Taxpayers
Many economists view taxing services as poor fiscal policy in part because of a process known as “pyramiding,” whereby the costs of taxes on services are passed on and services repeatedly taxed again through the production chain. These tax costs can snowball rapidly and add serious costs to end-consumers, particularly in services-intensive sectors.
Research by the California Foundation for Commerce and Education (CFCE), available at www.cataxandbudgetproject.com/facts, found that a 5% sales tax on business services would have the following impact:
• The average cost of a new single-family home would increase by more than $16,500;
• The average construction cost for a new school would increase by more than $17 million; and
• Costs for public infrastructure like roads and bridges would rise by 3.2%.
“A sales tax on services is effectively a tax on housing, a tax on infrastructure and a tax on everyday goods and services,” explains John Kabateck, state director of the National Federation of Independent Business of California. “California families and small businesses are already grappling with the astronomical costs of housing, with roads in need of repair, and with the high cost of living and doing business here—we do not need another tax to make things worse.”
Punishes Small Businesses
CFCE’s research also indicates that if a tax on services were imposed, large corporations can avoid the tax by bringing in-house many of the affected services—like legal, accounting or consulting.
In contrast, nearly 90% of impacted small businesses have fewer than 10 employees and couldn’t afford to bring these services in house, putting the smaller firms at a cost/price disadvantage with large corporations.
Moreover, the increased costs of business services caused by a services tax will disproportionately hit small businesses, which frequently have lower margins than larger businesses.
California Services Already Taxed
Proponents of a sales tax on services have suggested that services are somehow untaxed in California, and therefore should be taxed to “modernize” the economy.
Yet research by Justin Adams, Ph.D., for CFCE shows that business service sectors already pay $22.2 billion a year in taxes to the state, including income and corporation taxes.
The figure is high relative to other sectors/industries, when taking into account California’s high “sin taxes” on tobacco, alcohol and cannabis.
A sales tax on services would have an impact on services such as:
• Auto repair;
• Dry cleaning;
• Floral arranging;
• Hair styling;
• Landscape (including lawn) services;
• Legal help;
• Mortgage services;
• Realtors; and
For more information about the California Tax and Budget Research Project, visit www.CATaxandBudgetProject.com.