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The 7.25% solution

A TAXING DILEMMA: If done carefully, a levy on services makes sense for California.

May 06, 2008

When Democrats propose broadening sales taxes to cover services, and Republicans such as Gov. Arnold Schwarzenegger and business groups like the California Chamber of Commerce say no, taxpayers on either side of the issue know they can at least rely on the natural order of things. But when the governor's staff mulls a new service tax, and business groups back it, some kind of cosmic shift is afoot. Californians should embrace it -- warily.

Talk of a service tax is nothing new, and several other states routinely tax sales of services such as car repairs and health club memberships. Service taxes are drawing new attention here because the shortfall in the next budget year, which begins in eight weeks, is a mind-blowing $20 billion or more. There will most certainly be deep cuts, and they most certainly won't be enough. Finding enough savings from closing special-interest tax loopholes is a pipe dream. The state needs revenue to make ends meet.

California's economy has boomed over the decades, with much of the growth in new services, from catering to consulting to computer repair. The state once relied on sales taxes to supply most of its revenue, but no longer -- taxes on sales of hard goods represent a diminishing slice of the money the state needs to provide public safety, education, road repairs and basic services for the poor and elderly. As the state's service economy grows along with its population and its expenses, its tax revenue is left behind.

Applying the state's current 7.25% sales tax (8.25% in Los Angeles, higher in some other cities and counties) to services across the board makes sense, but only on paper. Imagine the gardener who juggles yards and schedules to make a living. Will he have to hire an accountant to properly tax his customers? Will he bother? New paperwork requirements could sap strength from California's economy at just the time it needs a boost.

Some in the governor's administration are instead focusing on a sales tax on lawyers and accountants, who presumably already have the number crunchers on staff to make sure the state gets its cut. They are also looking at taxes on tickets to sporting events, movies, amusement parks and golf courses. Some types of business undoubtedly will be spared, but taxing even some services the same way the state taxes goods would be a step toward a more rational and equitable system.

There are all kinds of ways the state could go wrong. When Californians restructure taxes, they codify a system that will be around for decades. Lawmakers cannot act in a fit of panic, but the scope of this year's challenge should encourage new solutions, including service taxes.

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