Another bill has surfaced threatening to impose a service tax in the Golden State.
Senate Bill 8, from Robert Hertzberg (D-Van Nuys), would impose a sales tax on all services, except those related to health care and education. Very small businesses generating less than $100,000 in gross sales also would be exempt.
The bill also proposes incentives for companies to invest and pay higher wages, as well as a personal income tax reduction. However, those measures would not go into effect until it is determined that funds from the service tax could cover them.
The bill in its current state seems to function as a placeholder because the language outlines in detail the reasons behind it, but does not yet provide much information about the changes themselves. It does state, however, that local jurisdictions would not be able to increase a service tax, which they can with sales taxes on goods.
To learn more about the feasibility of his proposals, Hertzberg will hold hearings statewide to gain the perspectives of stakeholders, said John Norwood, president/CEO of the California Pool & Spa Association.
Hertzberg has said he proposed the tax because the state’s economy has shifted from one relying primarily on agriculture and manufacturing to one mostly based on information and services, which he said accounts for 80 percent of economic activity.
But CPSA’s Norwood and others in the industry worry that such a tax would just strengthen the underground economy.
“People avoid those types of taxes by doing things for cash, and it undermines legitimate contractors,” Norwood said.
Others question the enforceability of such a tax. “They don’t even [collect] sales taxes on the underground economy. What makes them think they’re going to get a service tax?” said Bob Nichols, owner of Precision Pool in Glendora, Calif. “It [may] make guys back out of reporting those sales completely.
“It’s just another nail in the legitimate businessman’s coffin.”
CPSA has warned that a tax on services such as maintenance and repair may be down the road. The concern started in 2009, when a study by the state’s Commission on the 21st Century Economy advocated levies of this nature. In 2012, legislation was proposed, with one bill naming pools specifically. At CPSA’s prompting, the pool industry reference was removed, but then the bill ultimately failed.
California isn’t the only state that has eyed this possibility the last few years. In 2012, Connecticut enacted a service tax, while Michigan and Illinois tried and failed. Some were motivated by the government budget scares that occurred as a result of the Great Recession. Last year, Illinois’ current governor, Bruce Rauner, proposed a service tax as part of his campaign to beat incumbent Pat Quinn.
But such legislation has met resistance from business and consumers, suggesting an uphill battle for a service tax. Nichols doesn’t see the road to passage being any easier for this bill than it has been for others. “It depends on how the public takes it,” he said. “I don’t think they’re going to take it very well.”
For SB 8 to pass, it must receive a two-thirds vote. While this poses an obstacle, Norwood doesn’t expect the issue to go away. For example, such a proposal could instead appear as a 2016 ballot initiative.