These added costs and the competitive disadvantages would likely result in some small business closures or flight to other states. Although Hertzberg says he’ll exempt small businesses making less than $100,000 per year, that still leaves hundreds of thousands of California small businesses that would receive no relief.
But perhaps the most troubling issue with Hertzberg’s tax plan is the inherent flaws with broadening sales taxes to include business-to-business services which causes tax pyramiding. Tax pyramiding is a process where a consumer good is taxed multiple times during the production cycle which artificially increases the cost of that product or service without transparency to the end purchaser. States that have explored taxing services tried to reduce the harm of pyramiding through tax exemptions to specific services industries, but policymakers have found that all business inputs would need to be exempt from a services tax to avoid pyramiding.
In annual balloting of members of the National Federation of Independent Business, the state’s largest small-business association, the Golden State’s Main Street entrepreneurs have almost unanimously opposed a sales tax on services, 96 percent in 2016; 97 percent in 2017; and 98 percent in 2019.
I agree with Sen. Hertzberg that there is nothing more important than improving the economic well-being of California families. That’s exactly why the NFIB has joined the California Tax & Budget Research Project coalition to oppose any effort to tax services. Taxing services will make everyday goods and services more expensive and make it even harder to have a good quality of life and successful business in California.
John Kabateck is the California state director of the National Federation of Independent Business.