Lawmakers Consider State Tax on Services : Budget: Supporters say it could quickly ease the expected shortfall of up to $10 billion. Similar laws have been repealed in other states.
SACRAMENTO — Gov. Pete Wilson and lawmakers are considering a controversial levy that would tax a wide variety of services from legal advice to dry-cleaning--to help close the state’s huge budget shortfall, legislative sources said.
The main push for the proposal is coming from Assembly Speaker Willie Brown (D-San Francisco). But the plan gained additional standing when it was included this week in a budget and tax report prepared by Wilson’s chief budget adviser, Finance Director Thomas W. Hayes, with the assistance of 30 legislators.
The levy would be similar to a sales tax, but would be applied to a wide variety of services currently not taxed. It could be applied to a haircut, an oil change and yard or pool service. It could also apply to work done by tax preparers and accountants, architects, engineers, lawyers and other professionals.
Similar tax proposals touched off political firestorms when they were enacted in recent years in Florida and Massachusetts. Both states ultimately were forced to repeal the tax. In Florida, the tax on services was said to have contributed to the defeat of former Gov. Bob Martinez.
But supporters say that the tax is being used, to varying degrees, in six states.
It is unclear how much support such a tax would have in the California Legislature. But Wilson and legislators, who face a potential budget deficit of $8 billion to $10 billion over the next 15 months, have included it in their discussions.
Wilson and other Administration officials are not officially supporting the proposal, although they acknowledge that it is one of a number of tax and budget plans under discussion with lawmakers.
“We are not supporting the extention of the sales tax to services,†said Steve Olsen, deputy director in the Department of Finance. When pressed, Olsen added: “We haven’t flatly rejected anything.â€
Otto Bos, Wilson’s director of communications, said the Republican governor will not agree to any tax increases beyond the $1.8 billion in tax proposals he made in January until the Legislature begins acting on his package of $5 billion in spending reductions and other budget savings. “Until they start acting on some of the needed spending cuts, we think it is premature to talk about tax increases,†Bos said.
Supporters of the tax on services say that it makes sense because it reflects the modern-day realities of California’s economy, is progressive in that those better off financially would be expected to pay the most and, best of all in their eyes, would raise a lot of money very quickly. The tax is estimated to generate about $900 million for each 1% of the tax levy. Other states have used the existing sales tax rate to set the rate on their services tax; in California, that would mean a new tax of 6% to 7%, depending on the locality.
But because of a 1979 voter-approved spending limit, supporters are aiming for a tax in the 3% range. They say that is about all that could be raised without going over the limit. Brown also believes that a smaller tax rate would be easier for Californians to accept.
Steven M. Thompson, director of the Assembly Office of Research and a key adviser to the Assembly Speaker, said the current sales tax system is unfair because it taxes products but not services. “As our economy moves from a product-oriented economy to a service-oriented economy, it makes sense to reflect that in our tax system,†Thompson said.
The Speaker was not available for comment. Michael Reese, Brown’s spokesman, said: “He thinks it might be a solution. At this point, we are in desperate need of any idea that might help solve the budget crisis. The tax on services is a possible cure that intrigues Willie Brown.â€
Critics say that the tax could be a nightmare to administer and, if not done right, could drive Californians to seek professional services outside the state. Californians with big legal or accounting businesses could, for example, use lawyers and accountants in Nevada.
State Sen. Frank Hill (R-Whittier), who sat on the panel that recommended consideration of the new tax, said the proposal would hurt Republicans politically if they support it.
“It is a broad-based new tax and I don’t like it,†Hill said. “The crown jewels in the Republican Party are our consistent opposition to major new tax increase. We are fools if we go along with a broad-based sales tax or income tax or bank and corporation tax.â€
Democrats in the Senate are pushing another new tax proposal, one that would require property tax reappraisals for publicly traded corporations each time more than 50% of their outstanding stock changes hands. The proposed legislation would be retroactive to 1975, so it would mean most companies whose shares are bought and sold would have to be reappraised.
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