Tax on Services Awful for Businesses

As the 2020 election nears, Californians are bracing for an onslaught of local and state tax increase proposals on everything from property to soda. Proponents are already selling these taxes as though they are the missing piece in the California Dream, while conveniently ignoring the people who are going to pay more: taxpayers, consumers and small businesses.  As part of this mix, Sen. Bob Hertzberg (D-Van Nuys) is again advocating for adding sales tax to services, a fatally flawed fiscal policy that creates several harmful economic consequences for California. The fairy tale the Valley senator is selling is that taxing services will reduce California’s notorious budget volatility and that the $11 billion a year in new taxes will somehow help the average California family. The facts say otherwise, says a new group formed to educate policymakers and Californians about the extent of harmful impacts that result from a sales tax on business services. According to the California Tax & Budget Research Project, a new sales tax on services will not fix California’s budget volatility, no matter how the tax is structured.   The research project points to a recent study conducted by Justin Adams, Ph.D. for the California Foundation for Commerce and Education that found none of the recent sales tax on services proposals – including Hertzberg’s current proposal of a sales tax only on business-to-business services – would have fixed California’s budget volatility if they had been in place over the last 20 years. The reality is taxing services just increases taxes and spending, without addressing the structural problems of California’s tax policies. The problems with a sales tax on services run deeper than the false advertising by its proponents. It would cost consumers and businesses billions of dollars a year in higher costs for housing, infrastructure, and everyday needs like legal help, auto repair and banking. The Adams report found that a 5 percent sales tax on business services would result in higher costs and unintended consequences for consumers, including: • Increasing the cost of an average single-family home by at least $16,500. • Increasing the cost of new school construction by more than $17 million per facility. • Increasing the cost of all state and local infrastructure work by 3.2 percent.  These are only a few examples of how a tax designed to impact corporations will actually fall hardest on low- and middle-income consumers.  Small businesses also would be severely impacted. Not only will small businesses have to pay more for the services they rely on to run their operations, but the cost of sales taxes on services would get passed on by small businesses to their customers, raising the price of their goods against competitors. These added costs and the competitive disadvantages would likely result in some small business closures or flight to other states. Although Hertzberg says he’ll exempt small businesses making less than $100,000 per year, that still leaves hundreds of thousands of California small businesses that would receive no relief. But perhaps the most troubling issue with Hertzberg’s tax plan is the inherent flaws with broadening sales taxes to include business-to-business services which causes tax pyramiding. Tax pyramiding is a process where a consumer good is taxed multiple times during the production cycle which artificially increases the cost of that product or service without transparency to the end purchaser. States that have explored taxing services tried to reduce the harm of pyramiding through tax exemptions to specific services industries, but policymakers have found that all business inputs would need to be exempt from a services tax to avoid pyramiding. In annual balloting of members of the National Federation of Independent Business, the state’s largest small-business association, the Golden State’s Main Street entrepreneurs have almost unanimously opposed a sales tax on services, 96 percent in 2016; 97 percent in 2017; and 98 percent in 2019.   I agree with Sen. Hertzberg that there is nothing more important than improving the economic well-being of California families. That’s exactly why the NFIB has joined the California Tax & Budget Research Project coalition to oppose any effort to tax services. Taxing services will make everyday goods and services more expensive and make it even harder to have a good quality of life and successful business in California. John Kabateck is the California state director of the National Federation of Independent Business.