In a philosophical way, state Sen. Robert Hertzberg’s plan to create a sales tax on services makes sense. He argues that since service businesses – nail salons, car repair shops, law firms, etc. – now make up 80 percent of the state’s economy, the state may as well create a new tax of 6.5 percent on the receipts of those businesses. He envisions that personal income taxes could come down as a tradeoff.
That would broaden the state’s tax base and reduce California’s reliance on the incomes of top earners and the resulting see-saw revenue it provides.
But in a more practical way, taxes on services can be problematic. Defining a service business is one problem. It’s easy to say a barber provides a service, but does a rock-climbing facility provide a service? Or a gym where customers work out but don’t take classes?
Then there’s the pyramiding problem. Some endeavors require a string of services, and the tax on one gets added to the next so you get a tax on a tax. As pointed out in an article by reporter Howard Fine in the Business Journal last week, home sales – with title insurance, pest inspectors, escrow companies, etc. – is one such endeavor. Little surprise, then, that the Realtor community is gearing up to fight the proposed service tax.
And I understand why Hertzberg wants to exclude medical and educational services from his proposed service tax. But what’s the rationale for excluding small businesses from the tax? After all, you pay a sales tax on physical goods regardless of whether you buy it from CVS or the mom-and-pop drugstore on the corner. Why should you pay a tax when H&R Block prepares your return but not pay that tax when your neighborhood accountant does that work?
Hertzberg’s proposal may make sense in a broad way. But his plan represents a huge change with implications, particularly for the state’s businesses, that need to be thought through and understood. I mean, pass a big tax redo like that, and the Law of Unintended Consequences will get a thorough workout.
I like what one writer, Richard Rubin, blogged last week: Maybe it’s time for a state tax convention. One in which a variety of folks can come up with a comprehensive and updated tax plan. One that will last for years and give everyone – businesses and individuals – some certainty so that they can plan and invest in California.