Proposition 15 was defeated by over 600,000 votes and California managed to avoid another landmine on the road to economic recovery. The initiative would have been the largest tax increase in state history, impacting small businesses, farmers, and consumers the most.
While Californians can breathe a deserved sigh of relief, the reprieve may be short-lived. The Legislative Analyst’s Office is expected to come out with an updated analysis of the status of the General Fund. The deficit may not be as bad as initially projected, but we do expect a deficit of some amount.
Prop 15 was incorrectly hailed by some as an answer to budget volatility and its rejection could open the door to “creative” attempts to backfill the struggling general fund in 2021.
Personal Tax Increases are Unlikely
2020’s COVID-abbreviated session saw failed bills that sought to punish the wealthy by way of a Net Worth Tax (AB 2088) and a Millionaire’s Tax (AB 1253). When Governor Newsom endorsed Prop 15, he specifically said “In a global, mobile economy, now is not the time for the kind of state tax increases on income we saw proposed at the end of this legislative session and I will not sign such proposals into law.”
Hopefully the Governor’s statement coupled with a cold reception by policy committees will discourage such legislation.
A Tax on Services May be Proposed
Talk of imposing a sales tax on services—such as those provided by a plumber or a lawyer— has been growing again recently. Although supporters claim it will stabilize the state’s fluctuations in tax revenue, a sales tax on services will actually drive up costs of housing, infrastructure and everyday services.
If the problem is budget volatility, then a sales tax on services is not the solution. A new services tax is just another tax that will simply make services more unaffordable for all Californians. The California Foundation for Commerce and Education’s research found that a 5% sales tax on business services would have the following impact:
• The average cost of a new single-family home would increase by more than $16,500;
• The average construction cost for a new school would increase by more than $17 million; and,
• Costs for public infrastructure like roads and bridges would rise by 3.2 percent.
A statewide voter survey by the California Chamber of Commerce after the November 2018 election found that voters by a 3 to 1 margin opposed new taxes on services like lawyers, lawn care, or automotive repair—even if applied only to businesses.
Targeted Taxes Could Resurface
Attempts in the recent past to tax certain products and consumers could resurface this year. These efforts have included an employer headcount tax, soda tax, opioid tax, tire purchaser tax, oil and severance tax, and corporate CEO/pay disparity tax.
Targeted taxes are regressive and harmful to consumers. They increase the cost of doing business in California and those costs are naturally passed on to consumers by way of increased prices and job losses.
Hopefully 2021 is a year of economic recovery and a return to old normalcy—not the new normal. Legislative efforts need to focus on long term solutions rather than short-term revenue band-aids that harm business and drive away consumers.