Renewed Talk about Sales Tax on Services Raises Concerns for California Business

Governor Gavin Newsom signed the state budget with a $21 billion surplus, but expressed his support for a new sales tax on services in California. Although details are sparse, any new tax on services would affect not just businesses, but consumers, who already pay a sales tax.

In this episode of The Workplace, CalChamber President and CEO Allan Zaremberg is joined by Loren Kaye, president of the California Foundation for Commerce and Education, to discuss the proposed sales taxes on services and the changes it would bring to California’s budget and economy.

What a Sales Tax on Services Would Look Like

The sales tax on services, as envisioned by its proponent, Senator Robert Hertzberg (D-Van Nuys), is aimed at businesses in California, but that doesn’t mean it won’t also affect consumers.

“The latest proposal…is to charge a services tax just on business-to-business services, but don’t think that that doesn’t mean that consumers won’t pay,” Kaye tells Zaremberg. “Consumers will pay because to the extent businesses pay higher sales taxes on services, they’ll pass it on to consumers.”

Furthermore, if consumers purchase anything that requires multiple services, they will pay even more as these taxes add up.

“We’ve estimated, in fact, that the sales tax on services at just a 5 percent level… would increase the [price of an] average house in California by $16,000,” says Kaye.

In some cities in California where local add-on taxes supplement the state rate, the tax would raise even more money. Currently, the sales tax in Los Angeles is 9.5%, meaning if the proposed sales tax on services were to pass, the tax in Los Angeles County would go up greatly.

If the sales tax on services passed, small businesses would be hit hardest. Large corporations will have the resources and ability to bring services work in-house; however, smaller companies may have no choice but to continue hiring help from the outside.

Why the Tax Is Being Proposed

With such a large budget surplus, many Californians are wondering why more taxes are being proposed. The sales tax on services has been proposed to help mitigate budget volatility, which in actuality is a consequence of the state’s high income tax.

California has the highest income tax rate in the nation. The state’s multibillion-dollar budget surplus is due to the high income tax rates, mostly attributable to the earnings of the top 1% of the state’s population. Because much of these earnings are from capital gains, they are very sensitive to economic conditions, which in turn creates the state’s notorious budget volatility.

“You can’t have enormous revenue gains when the stock market is good without having the threat of big dips when we hit a recession,” adds Kaye. “If you want to solve the volatility, you’ve got to give up the big revenue bumps.”

Although a sales tax on services has been proposed before, it has never been introduced into the Legislature while the state had a huge budget surplus.

“This is going to hit everybody,” says Kaye. “It is going to hit big businesses, consulting services, small businesses. Anybody that hires a contractor, a consultant, any sort of a service business is going to be affected.”

Employers can find more information on the proposed sales tax on business services by visiting the CalChamber website or checking out the California Foundation for Commerce and Education report on the effects of the tax.

The California Chamber of Commerce is the largest, broad-based business advocate to government in California, working at the state and federal levels to influence government actions affecting all California business. As a not-for-profit, we leverage our front-line knowledge of laws and regulations to provide affordable and easy-to-use compliance products and services.