Trending California Tax News: A bite at the bottom…NOW a bite at the top?

California Senator Bob Hertzberg (D – San Fernando Valley) proposed January 12th, a sales tax on professional, construction, financial and agricultural services, as a part of a plan to raise $10 billion in new revenues for the State of California. Yes, that’s right $10 billion with a “B.”

Hertzberg suggests that he has three main objectives with his bill: “One, harmonizing the economy and the growth of the economy with the tax system,” he says. “Two, creating a tax system that supports the core values that we care about, education, infrastructure. And three, bringing government closer to the people.”

Senator Hertzberg’s bill, and his rationale for it, seems at odds with other information about tax revenue needs and education funding coming out of Sacramento. According to Governor Brown’s State-of-the-State address on Jan 5, 2015, “Next year schools will receive $65.7 billion, a 39 percent increase in four years.” “Soon we will make the last payment on the $15 billion of borrowing made to cover budget deficits dating back to 2002. We will also repay a billion dollars borrowed from schools and community colleges and another $533 million owed to local governments.” Thanks to Proposition 2, passed in November 2014, we apparently have the capacity, according to the Governor, to fund a $2.8 billion Rainy Day fund. If we really do have a balanced budget in the State of California, as Governor Brown suggests in his State-of-the-State address, why would we need more taxes at this time?

In November of 2012, the voters passed Proposition 30 which increased the top tax bracket in the State to 12.3% through 2018. This makes California the state with the highest marginal personal income tax rate in the nation. Prop 30 also increased the State sales tax by 1 full percentage point. Governor Brown points to this proposition, along with fiscal responsibility, as the primary contributors to the balanced budget.

Rather than undertake a massive tax increase like that proposed by Senator Hertzberg, shouldn’t we look at reforming the entire state tax system as it applies to individuals, businesses and investors in order to fund key government objectives, while not overburdening the state’s taxpayers? Simply passing into law a massive new tax as proposed by Senator Hertzberg seems inconsistent with responsible government.

State supporters often site the great weather, vibrant business community and wealth of natural and human resources that California provides as reasons that businesses thrive here. There is a limit however as businesses increasingly are not tied to a specific state for resources or personnel due to the advent of the internet and the ability for employees to work remotely. If California is to remain attractive to business there is a limit to the tax burden that can be imposed before business leaders decide in earnest to go elsewhere.

Adding to the cost of obtaining professional services will tend to slow the current economic recovery, and curtail access by those individuals requiring professional services by increasing costs. It’s enough that the State takes a big bite out of a service provider’s bottom line…now they want to take a bite out of the top line, too?

That’s our perspective. We would be interested in yours!

 


 

Chris Chillin LRChris leads the Financial Systems and Reporting, Technical Accounting and Stock Compensation, and Enterprise Risk Management practice groups and is a senior member of the International practice group. He is expert in designing and implementing financial management solutions utilizing technology.

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