New tax would hit services

 

Tax reform is in the air. One proposal is by state Sen. Bob Hertzberg, D-Los Angeles, also a former speaker of the Assembly.

Senate Bill 8, the Upward Mobility Act, would raise $10 billion in sales and use taxes to replace the $7 billion Proposition 30 raised largely from taxes on the wealthy. Prop. 30 was passed by voters in 2012 and was heavily supported by Gov. Jerry Brown. Prop. 30 expires in 2018. SB8 would take effect in 2019.

Oddly, SB8 largely would target such Democratic Party constituencies as professionals and service-sector businesses with more than $100,000 in gross income. Health care and education services would be exempted.

The money would be spent this way: $3 billion would go to K-12 schools and community colleges, $2 billion to the university systems, $3 billion to local governments and $2 billion to a new earned-income tax credit for poor families.

The reasoning behind SB8 was spelled out by columnist George Skelton:

“California is relying less on the sales tax, which applies only to purchased goods, while leaning heavily on the richest 1 percent, whose incomes fluctuate like a roller-coaster.

“In 1950, the sales tax generated 60 percent of all state revenue, the income tax just 10 percent. Today, the sales tax brings in around 25 percent, the income tax more than 60 percent.”

Under current law, the sales tax is applied to concrete items, such as a car or computer; food is exempt. The reasoning behind not taxing services is that what is offered – such as business consulting or legal advice – is intangible. Moreover, many such services easily could be outsourced to another state to avoid taxation – such as hiring computer programmers in Texas or India.

The services tax also especially would hit small- and medium-sized businesses, such as independent real estate brokers, auto repairmen and handymen.

Tax boost

By costing $10 billion to the $7 billion of Prop. 30, SB8 would be a 43 percent tax boost. And although the California economy is performing well now, it’s impossible to say how it will be doing four years from now.

A services tax also would encourage the growth of black markets. For example, in September the Los Angeles Times reported:

“Nine people were arrested in raids targeting 75 locations, and $90 million was seized — $70 million in cash. In one condo, agents found $35 million stuffed in banker boxes. At a mansion in Bel-Air, they discovered $10 million in duffel bags. 

“Federal officials said they believe that the drug organizations have used businesses throughout Los Angeles to convert their vast earnings into pesos, turning the city into a hub for ‘trade-based money laundering.’” 

People in black markets obviously don’t pay sales, income or other taxes.

GOP minority

Although Republicans remain a minority in both houses of the California Legislature, on Nov. 4 they gained enough new seats to prevent a two-thirds Democratic supermajority.

All Republicans are expected to oppose any tax increase of any kind.

So it’s the lack of a supermajority that would prevent SB8 from being passed.

Shift to non-profit economy

Oddly, SB8 is being advanced at a time when some tax-generating assets are being taken off the tax rolls, also benefiting the rich at the expense of everybody else.

One is the current shift of private electric utilities to non-profit municipal electricity-buying cooperatives, called Community Choice Aggregation.  Such cooperatives tout savings to customers for avoiding taxes paid by such regulated electric utilities as Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric.

Currently, 16 cities in the South Bay area of Southern California are planning to opt out of Edison and set up their own cooperatives, with the wealthy cities of Redondo Beach and Manhattan Beach leading the way. That will be lost corporate taxes to the state and property taxes for local government. Effectively, the wealthy people in those areas are sloughing off their tax obligations to those in other areas.

As reported by CalWatchdog.com, electric buying cooperatives not only avoid paying corporate taxes but offload expensive green power costs onto federal taxpayers by buying heavily subsidized green power and Renewable Energy Credits.

The long-term experience of the State of Illinois with electric buying cooperatives is that they show initial benefits to customers, but don’t make economic sense in the long term.

Assembly Bill 2145 of 2014 proposed to make it more difficult for cities to form electric buying cooperatives.  However, it died in the state Senate in September.