CalTax comments on a legislative proposal to tax services

California Taxpayers Association president and CEO Robert Gutierrez has released the following statement on Senate Bill 522, a new bill that contains placeholder language to impose a new tax on services purchased in California:

“The state has record reserves, while many Californians are struggling to pay their bills. The last thing Californians need is a new tax that would dramatically increase the cost of living, further straining their family budgets. A sales tax on services will increase the costs of education, healthcare and the affordability of housing.”

There are many problems associated with taxing services, including:

  • Increasing the competitive disadvantage faced by California businesses, by increasing the cost to produce goods and services in this state.
  • Creating competitive disadvantages between in-state businesses that can afford to hire employees to perform services and smaller businesses that contract out for services.
  • Tax pyramiding, which occurs when taxes are imposed on various stages of production of an item, and also when the item ultimately is sold to a consumer. This increases overall production costs, which are passed on to consumers, and also reduces tax transparency.
  • Administrative and auditing problems, including difficulty to determine where a service is consumed, especially for multistate businesses.

These types of problems, coupled with public outcry over the impact on taxpayers, led four states (Florida, Maryland, Massachusetts and Michigan) to repeal services taxes shortly after enactment.

California Taxpayers Association is a nonpartisan, nonprofit association formed to support sound tax policy, oppose unnecessary taxes and promote government efficiency.

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