Taxing proposal: Haircuts, bowling and other services targeted as taxable items

Nothing makes Texas and Arizona business leaders smile more than the ongoing (and preposterous) ideas that come out of Sacramento.

Years and years of the Legislature’s disregard for taxpayers and disdain for people who dare to be successful has led to California’s status as one of the highest taxed states in the nation, and its embarrassing title as the worst state in which to own a business.

That’s why more than a few businesses are saying hasta la vista to California and hello to Dallas, or Houston, or Phoenix.

But believe it or not, some political leaders want to tax the people even more.

A perennial favorite idea that floats around the halls of the Capitol is a scheme to create a sales tax on services such as haircuts, veterinary visits, taxi rides, concerts, bowling – you name it. If it’s a service, it could become subjected to taxation.  

This plan is great for U-Haul’s “one-way ticket out of California plan,” but bad for everyone else.

Budget negotiations should never go near this bad plan. Here are seven reasons why:

Creating a sales tax on services ignores the fact that many services can be performed out of state. For example, a software company in California can do the same programming in neighboring states and without the extra bookkeeping burden. The same holds true for graphic artists, web designers, architectural drafters, and so on.  Consumers would seek these services from out-of-state vendors, which kill jobs in our state, and people who provide these services would consider moving out of state, which is another form of job killing.

For brick and mortar operations that can’t move out of state, like barbershops, nail salons and taxi drivers, the increased cost will affect the bottom line of their already thin margins. In the competitive environment that is commerce and business, smaller companies may not want to pass the extra expense of service tax onto their consumers.

Small business would be at a competitive disadvantage compared to large outfits. Smaller businesses often use outside providers such as accountants or computer programmers for many services and would have to pay taxes on these services. A large business can perform these activities in-house to avoid the taxes.

The incentives and rewards of operating in the underground economy will become more appealing to unscrupulous service businesses seeking to avoid taxation and gain an advantage over law-abiding competitors.

Like sales tax or Social Security contributions, taxing services is a regressive tax that will pinch the pockets of low-income families who end up paying a higher percentage of their net income than households earning middle- to upper-income class wages.

Some taxpayers who provide personal services including gardeners, babysitters, music teachers and financial advisors could be subject to double taxation by being requited to pay both sales tax and income tax on the same service.

California has an opportunity to learn from other states, such as Florida and Massachusetts, which have created new sales tax for services only to repeal them for the reasons listed above.  Michigan and Maryland enacted a similar tax on services only to rescind the laws before they even became effective.  These states understood that this tax would not have the intended result of additional revenue to the general fund, and likely would lead to greater confusion on the part of the taxpayer.

These reasons all lead to the same result: Job loss. At a time when our state unemployment rate is hovering in the Depression-era rate of 13 percent, the idea to tax services would continue California’s joblessness free fall.  

Thus, if this idea to tax services were ever to become law, watch households retreat from spending discretionary dollars on things like bowling on Saturday night and pedicures before the prom.  This too will lead to further job loss.

Breaking the backs of small business and struggling families is not exactly a smart way to stimulate the economy.