It’s no secret that California’s sales tax system isn’t working. The state currently generates two-thirds of its revenue from income taxes; 65 years ago only 12% came from income taxes and 60% was generated by sales taxes.
About The Upward Mobility Act
Former Assembly Speaker Bob Hertzberg, now a member of the state senate, proposed what he calls the Upward Mobility Act, which focuses on:
- Expanding CA sales taxes to include more services
- Lowering the state’s base rate from 7.5% to 4%
- Getting rid of local add-on taxes
He claims this would, “Generate billions of extra dollars that he says the state could use to fund schools, local government and the university systems while providing tax credits to protect the poor.” He also says this would encourage entrepreneurs by reducing corporate tax burdens on small businesses.
Another Take on the Upward Mobility Act
Chris Micheli, a Principal with the government relations firm of Aprea & Micheli Inc., has a different take on Hertzberg’s plan. His arguments against it include:
- Taxing services will not stabilize California’s overall revenue streams because the General Fund revenues’ fluctuations come from the state’s over-reliance on income taxes paid by the top 1% of income earners.
- A tax on services is a direct tax on labor and the state already has the second highest unemployment rate in the country.
- The state Legislature already considered taxing services multiple times but each time the legislation either wasn’t passed or was vetoed.
- Taxing services would be bad for California’s business climate.
- It’s not clear how feasible the proposal is administratively. “It would be difficult for business owners and the state Board of Equalization to properly identify and track the information required.”
- A service tax may encourage consumers to purchase from out-of-state providers. “The more expensive the service, the more in taxes that would be paid which, in turn, will create a stronger incentive to move the business out-of-state.”
- It would create ‘a tax on a tax’ scheme. “Any sales tax paid by a business will be factored into the prices it charges for goods and services, which would also potentially be subject to tax.”
- Small and mid-sized businesses that need to contract for services, which don’t have the means for the same services in-house, would feel more of the burden than larger companies.
- California employers are already facing significant costs of doing business in the state, including, “Increased personal income and sales taxes under Proposition 30, higher workers’ compensation rates, higher minimum wage, reduced federal unemployment insurance credit, higher energy costs, and increased costs due to the implementation of the Affordable Care Act.”
What do you think of the Upward Mobility Act? Do you think it’s feasible to tax services to provide California with another major source of revenue beyond income and sales tax?
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit and the California Manufacturer’s Partial Sales Tax Exemption. To learn more, contact us today at www.MilesConsultingGroup.com.
Photo Credit: Chuck Coker
