SACRAMENTO, Calif. (CN) – A California Democrat on Monday proposed a new state tax targeting “high-end business services” as a stopgap measure to soften the blow of the recent federal tax overhaul on residents.
State Sen. Bob Hertzberg, D-Van Nuys, says extending California’s sales tax to services that law firms, accountants and other consultants provide to corporations would stabilize the state’s volatile budget and provide relief to residents hurt by the Republican tax reform bill signed by President Donald Trump in December.
“I have been working on this issue for years,” Hertzberg said in a statement. “The severe impact of the Trump tax on California means now is the time to bring this idea to life, in a way that is smart and creates lasting improvements to our tax system.”
Under Senate Bill 993, businesses with more than $100,000 in annual sales receipts would see a “modest tax” on purchased services and related expenses. The new revenue would be placed in a “Retail Sales Tax on Services Fund” and be distributed by the state treasurer to California’s middle-lower income residents as well as to infrastructure and education projects.
The bill’s initial language does not clarify what percentage of business services will be taxed, nor does it outline how the funds will be divided.
Hertzberg’s office said the percentage will be sorted out by a policy committee, and added other states’ tax rate on business services range between 4 to 6 percent.
The legislation is the latest attempt by California Democrats to rebuff the tax reform signed by Trump. State Democrats have accused the federal government of targeting California and other blue states and claim the tax reform could cost Californians billions by capping tax deductions at $10,000.
Last week, the state Senate passed a measure to give residents a work-around the deduction limit by donating to a fund within California’s budget that contributes directly to state-funded higher education institutions.
According to Hertzberg, businesses could potentially pay lower taxes than before the federal changes because they will be allowed to deduct the new sales tax on their federal taxes. Health care, education and child care services would be exempt under his bill.
In addition to residents, Hertzberg hopes the state’s coffers receive a boost. He says California’s tax code – which relies heavily on personal income taxes – would be diversified under his bill with the influx of sales tax revenue.
“These changes would more fairly apportion taxes between goods and services and would produce more stable revenues,” the bill states.
Because the legislation creates a new tax, it needs to pass both the state Senate and Assembly with two-thirds supermajorities to land on the governor’s desk.