Senate BillNo. 8

Introduced by Senator Hertzberg

December 1, 2014

An act relating to taxation.


SB 8, as introduced, Hertzberg. Taxation.

The Sales and Use Tax Law imposes a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. The Personal Income Tax Law imposes taxes on personal taxable income at specified rates, and the Corporation Tax Law imposes taxes upon, or measured by, corporate income.

This bill would state legislative findings regarding the Upward Mobility Act, key provisions of which would expand the application of the Sales and Use Tax law by imposing a tax on specified services, would enhance the state’s business climate and would incentivize entrepreneurship and business creation by evaluating the Corporate Tax Law, and would examine the impacts of a lower and simpler Personal Income Tax Law.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

P1    1


The Legislature finds and declares all of the

P2    1(a) California has long been known as the land of opportunity,
2the republic of the future. But for too many of its residents the
3future is receding. Inequality continues to rise -- even though
4California has one of the most progressive tax structures in the

6(b) Something more is needed; a new philosophy of governance
7that focuses on the overall progressive outcome that can be
8achieved through modernizing our tax system and investing in the
9means of upward mobility, above all job creating infrastructure
10and public higher education for our increasingly youthful

12(c) Beyond these foundations, building and sustaining a middle
13class means new jobs with good wages. Small businesses, like
14plumbing contractors, auto repair shops, and restaurants that
15account for over 90 percent of the state’s businesses and well over
16a third of all jobs, are a key rung on the ladder of upward mobility.
17They need a tax policy that will enable them to grow and add

19(d) California’s two trillion dollar economy has shifted from
20being mainly agricultural and manufacturing in the 1950s and
211960s, when the framework of today’s tax system was set, to one
22based on information and services, which now accounts for 80
23percent of all economic activities in the state. To achieve a future
24as promising as California’s past, we need a tax system that is
25based on this real economy of the 21st century while ensuring that
26new revenue is invested in strengthening the ladder of mobility
27for all our residents.

28(e) California of the 1950s and 1960s was governed with an eye
29towards the future and was renowned for the opportunities that it
30created for its residents. California’s water system was born during
31that era and transformed the desert into fertile agricultural land
32that not only fed Californians but the world. California also
33constructed its freeway system to more rapidly and safely move
34people and goods through the state as California became the
35gateway to the Pacific Rim. California’s higher education system
36was the envy of all, reaching new heights as the University of
37California and the California State University grew by six and
38eight campuses respectively between 1958 and 1965. California’s
39investment in infrastructure and education paid off as agriculture,
40aerospace, and then technology boomed and drove California into
P3    1the 21st century as the fifth largest economy in the world. As
2businesses thrived, they created an abundance of middle class jobs
3that enabled Californians to capitalize on new opportunities to
4better the standard of living for themselves and their families.

5(f) As California’s economy thrived, however, its eye on the
6future wavered. By the late 1970s, state and local finances became
7intertwined; the state increasingly used its funds to support
8traditionally local operations and both state and local governments
9pulled back on the types of investments needed to help businesses
10and residents succeed. Today, Californians live with the
11investments made more than three generations ago. Fifty-five
12percent of our local streets need to be repaired or replaced. While
13the state’s water system received some funding in 2014, more is
14needed to meet the state’s demands.

15(g) On a local level, 70 percent of Los Angeles’ water
16infrastructure is composed of cast-iron pipes, most of which was
17laid during the early half of the 20th century.

18(h) Our financial commitment to kindergarten and grades 1 to
1912, inclusive, education has waned. Average Daily Attendance
20grew anemically by 0.06 percent annually between 2007 and 2011.
21By 2011, California ranked 43rd in per pupil spending and
22California’s ADA was $2,580 less than the United States average
23-- the largest gap in 40 years.

24(i) California’s commitment to higher education has also
25receded. In addition to opening professional and economic
26doorways for students, California’s higher education system is one
27of our most important economic engines. With almost 60 faculty
28and researchers who have won the Nobel prize, the University of
29California has over 3,200 active patents and contributes $33 billion
30to the California economy annually. The California State University
31generates an additional $17 billion in economic activity and
32supports 150,000 jobs in the state. Despite its proven value,
33California has not been able to maintain higher education
34accessibility for its residents. In the past 20 years, University of
35California fees have increased by 434 percent and California State
36University fees by 300 percent. Moreover, California community
37colleges, the largest provider of workforce training in the nation,
38increased fees by 130 percent between 2008 and 2012, leading to
39over a 20 percent decline in enrollment.

P4    1(j) The lack of investment in infrastructure and education has
2diminished opportunities for Californians and continues to fuel
3the growing income inequality in California. Since 1970, the
4poorest 20 percent of Californians have seen their household
5income grow by just 3.1 percent while the income of the richest
620 percent has climbed 74.6 percent. Since 1987, 71.3 percent of
7all the gains generated by California’s economy have gone to the
8state’s wealthiest 10 percent. Moreover, today, California accounts
9for three of the 10 American cities with the greatest disparities in
10wealth--San Francisco, Oakland, and Los Angeles.

11(k) (1) The Upward Mobility Act would help ensure California’s
12residents and businesses can thrive in the 21st century global
13economy by increasing funding by $10 billion dollars for the
14following programs, as the revenue becomes available:

15(A) Three billion dollars to K-14 education. Investing in its
16residents through education is the foundation on which California
17has always built its economy. This measure would provide new
18funds to help rebuild California’s education system at every level.
19The new revenues will help to rebuild classrooms and be available
20to help protect classroom spending from pending pension fund

22(B) Two billion dollars to the University of California and the
23California State University. Similarly, the measure would restore
24investment in California’s prized higher education system, essential
25to upward mobility for Californians. Revenues would be split
26evenly between the University of California and the California
27State University.

28(C) Three billion dollars to local governments. Investing in local
29governments will more closely connect Californians to the
30government spending that occurs on their behalf and support the
31new realignment burdens on local government. Moreover,
32additional guaranteed funding to provide additional public safety,
33parks, libraries, or local development, will allow local governments
34to best meet the specific needs of their particular communities.

35(D) Two billion for a new earned income tax credit for
36low-income families. The Upward Mobility Act would establish
37a refundable earned income tax credit to help low-income families
38offset the burden of the proposed sales and use tax on services.

39(E) Small business and minimum wage relief. This measure
40would enhance the state’s business climate, create jobs, and
P5    1incentivize entrepreneurship by evaluating the current corporate
2income tax to determine whether it is meeting its intended purpose
3while at the same time linking changes to a more reasonable
4minimum wage.

5(2) Because this funding would be guaranteed, school districts,
6community colleges, the California State University, the University
7of California, and local governments would be able to securitize
8the revenues to make essential long-term investments, just as is
9the case with real property taxes.

10(l) The Upward Mobility Act will fund these programs to enable
11the upward mobility of our residents and to help make California’s
12businesses more competitive by modernizing our tax code. The
13underlying problem is, while California’s economy has evolved,
14its tax system failed to keep up with the times. Over the past 60
15years, California has moved from an agriculture and manufacturing
16based economy to a services based economy. As a result, state tax
17revenues have become less reliant on revenues derived from the
18Sales and Use Tax on goods and more reliant on revenues derived
19from the Personal Income Tax. In 1950, the Sales and Use Tax
20comprised 61 percent of all state revenues; today, it accounts for
21about 30 percent. The Personal Income Tax accounted for 12
22percent of total state revenues in 1950; today, it accounts for more
23than 60 percent.

24(m) Moreover, California’s General Fund tax collections are
25heavily dependent on the earnings of its top earners. This has led
26to dramatic revenue swings year over year. During the dot-com
27economic boom of the 1950s through the early part of the 21st
28century, state revenues soared by as much as 20 percent in a single
29year. However, as personal incomes tumbled during the Great
30Recession, state revenues plummeted disproportionately. These
31swings in revenue have led to the suffering of California’s
32residents. Essential services, such as health care and child care for
33low-income families, were cut at a time when they were needed
34most. In addition, the state cut billions of dollars to education,
35including adult vocational and literacy education, which could
36have helped low-income families recover from the recession.
37Relying on the wealthiest taxpayers to support California’s needs
38is outdated and dangerous fiscal policy. Not only does it increase
39the uncertainty of tax collections, but there is evidence that
P6    1California’s high tax rates may be driving high income earners out
2of the state, which only deepens revenue shortfalls.

3(n) The economy has shifted away from the production of goods
4to services. Since 1966 sales of taxable goods, as a share of the
5economy, have been cut in half. Today services represent 80
6percent of California’s economy. Expanding the Sales and Use
7Tax to cover services removes a significant inequitable aspect of
8the tax code, implicitly favoring consumer spending on services
9over goods. Currently the sale of a TurboTax software disk is
10taxed, whereas a consumer who instead paid H&R Block would
11escape taxation. In essence, those who produce goods such as
12software or machinery are supporting those who produce services
13and information. Taxing only goods and not services when our
14economy has been so fundamentally transformed makes no sense
15and is manifestly unfair. This has to change.

16(o) The Upward Mobility Act seeks to make three broad changes
17to the tax code:

18(1) Broaden the tax base by imposing a sales tax on services to
19increase revenues. Local jurisdictions would not be authorized to
20increase sales tax on services, as they now can do with the sales
21tax on goods. Though the new revenues would be collected by the
22state, the ownership of those funds allocated to local government
23under this measure will be controlled by local government using
24traditional allocation mechanisms. Health care services and
25education services would be exempted from the tax, and very small
26businesses with under $100,000 gross sales would be exempted
27from the sales tax on services.

28(2) Enhance the state’s business climate and incentivize
29entrepreneurship and business creation by evaluating the corporate
30income tax to determine whether it is meeting its intended
31purposes, including whether it is born equitably among California’s
32businesses and what impact it has on the business climate, while
33at the same time linking changes to a more reasonable minimum

35(3) Examine the impacts of lowering and simplifying the
36Personal Income Tax while maintaining progressivity. The
37measure’s goal is to reduce the income tax rates imposed under
38the Personal Income Tax for low-and middle-class-income
39households so that families earning $100,000 pay only $1,000.
40The income tax rate for top earners may also be reduced in a
P7    1manner that balances fairness with mitigating adverse impact to
2both state revenues and competitiveness. The obligation of top
3earners with regard to other tax obligations for top earners,
4including Proposition 63, would remain intact.

5(p) In order to ensure fiscal responsibility, the Upward Mobility
6Act’s revenue reduction provisions would be phased in only when
7it is clear that new revenues are sufficient to replace any revisions
8to the personal income tax and corporate tax.

9(q) As the revenues secured by Proposition 30 expire, California
10policy decisionmakers must determine new long term ways to
11provide for state residents. The Upward Mobility Act will increase
12opportunities for California’s businesses and create an upward
13mobility ladder for California residents. Moreover, the Upward
14Mobility Act will realign the state’s outdated tax code with the
15realities of California’s 21st century economy.