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Firms Fear Proposed Services Tax


The $30 hourly fee for accordion lessons at Dave's Accordion School in the Atwater Village would probably go up.

So would the cost of having a tent zipper replaced at Leslie's Outdoor Gear Repair in Costa Mesa if the state begins taxing not just the new zipper, but the labor required to sew it in.

"It means that every time I sew up a little hole, I'd have to pass it along to my customers," said proprietor Leslie Pemberton. "It would get really confusing."

Dave Caballero said an additional tax, even a small one, could put his struggling studio and instrument repair shop out of business, despite the strong interest in playing the accordion. "It adds up . . . with rent and utilities and everything else we have to pay," he said.

Such concerns have spread recently, since Assembly Speaker Willie Brown (D-San Francisco) proposed and Gov. Pete Wilson said he might consider taxing virtually every service in California to raise billions of dollars to help balance the state's budget. The budget shortfall over the next 15 months is estimated at $12.6 billion, and each 1% tax on services would raise $1 billion to $1.3 billion.

Because such a tax would be virtually ubiquitous, potential opponents are numerous. The work of accountants, architects, bankers, contractors, lawyers, real estate agents and lobbyists would be subject to the tax. So would commercial child-care providers and the work of hairdressers, gardeners, barbers, mechanics and electricians. Only health services have been ruled off limits.

Steve Thompson, director of the California Assembly Office of Research, which is formulating the details of the tax under Brown's direction, said opponents are not yet organized but are expected to lobby hard. "There's not a single tax being proposed relative to the state's budget crisis that is enthusiastically received by anybody," Thompson said. "Taxes never are."

The levies have never been attempted in California, but similar taxes are common in Europe and proved controversial in Massachusetts and Florida, where they were rescinded. The handful of other states that tax services generally have economies that are small or isolated, such as Hawaii and South Dakota.

Such a tax is attractive to some state leaders because services represent a vast, untapped and rapidly growing sector of the economy. Moreover, many believe that the line between transactions that involve the sale of a product and those that involve the sale of a service is becoming increasingly blurred. Why, analysts ask, should the purchase of a computer be taxed, but not the work of computer programmers or repair technicians?

"We have a tax on production, but not on services, unlike Europe, which treats the two the same," Thompson said. Meanwhile, the service sector of the economy is growing faster than the manufacturing sector, he said.

"The advantage of this tax is that it grows with the economy," he said. "A tax system that taxes things that are not elastic, that do not grow, is one that is doomed down the road. There is a decent and fair logic to it."

Initially, the tax rate could be low--2% to 3%, for example, in contrast to the 7% sales tax levied in many counties, Thompson said. Eventually, the sales tax and the tax on services could be levied at the same rate, somewhere in the middle, he said. Speaker Brown, however, recently raised the possibility of initially imposing a service tax rate of up to 7%.

Although methods of levying and collecting the tax are still being discussed, the goal would be to keep the process as simple as possible. Most likely, businesses' gross receipts would be subject to the tax, which could then be deducted as an expense for income tax purposes. Small businesses, those with gross incomes of $30,000 or less, probably would be exempt, he said.

Raising prices to offset the tax, therefore, would be optional but likely. And the effect such a tax would have on the delicate California economy is unknown.

The amount that the tax would add to individual transactions would be small. But the cumulative effect on consumers could be large. For example, a 2% tax passed on to a client by an accountant would add only $8 to a $400 fee for an income tax return. But if it were added to everything from a carwash to a haircut, from having clothes cleaned to shoes resoled, the impact would grow.

"It will produce economic dislocation, we just don't know where," said George Johnson, a Pasadena economist who plans to study the effects of the proposed tax on the economy for the Los Angeles Chamber of Commerce. "The individual consumer would definitely be impacted, and you can intuit that the effect would be wide-ranging."

Some critics say that it could slow the state's climb out of recession if it caused consumer prices to go up sharply. Others contend that it would drive businesses out of California or cause large purchasers of services to buy them elsewhere.

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