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.


  SECTION 1.  The Legislature finds and declares all of the
   (a) California has long been known as the land of opportunity, the
republic of the future. But for too many of its residents the future
is receding. Inequality continues to rise -- even though California
has one of the most progressive tax structures in the nation.
   (b) Something more is needed; a new philosophy of governance that
focuses on the overall progressive outcome that can be achieved
through modernizing our tax system and investing in the means of
upward mobility, above all job creating infrastructure and public
higher education for our increasingly youthful population.
   (c) Beyond these foundations, building and sustaining a middle
class means new jobs with good wages. Small businesses, like plumbing
contractors, auto repair shops, and restaurants that account for
over 90 percent of the state's businesses and well over a third of
all jobs, are a key rung on the ladder of upward mobility. They need
a tax policy that will enable them to grow and add employees.
   (d) California's two trillion dollar economy has shifted from
being mainly agricultural and manufacturing in the 1950s and 1960s,
when the framework of today's tax system was set, to one based on
information and services, which now accounts for 80 percent of all
economic activities in the state. To achieve a future as promising as
California's past, we need a tax system that is based on this real
economy of the 21st century while ensuring that new revenue is
invested in strengthening the ladder of mobility for all our
   (e) California of the 1950s and 1960s was governed with an eye
towards the future and was renowned for the opportunities that it
created for its residents. California's water system was born during
that era and transformed the desert into fertile agricultural land
that not only fed Californians but the world. California also
constructed its freeway system to more rapidly and safely move people
and goods through the state as California became the gateway to the
Pacific Rim. California's higher education system was the envy of
all, reaching new heights as the University of California and the
California State University grew by six and eight campuses
respectively between 1958 and 1965. California's investment in
infrastructure and education paid off as agriculture, aerospace, and
then technology boomed and drove California into the 21st century as
the fifth largest economy in the world. As businesses thrived, they
created an abundance of middle class jobs that enabled Californians
to capitalize on new opportunities to better the standard of living
for themselves and their families.
   (f) As California's economy thrived, however, its eye on the
future wavered. By the late 1970s, state and local finances became
intertwined; the state increasingly used its funds to support
traditionally local operations and both state and local governments
pulled back on the types of investments needed to help businesses and
residents succeed. Today, Californians live with the investments
made more than three generations ago. Fifty-five percent of our local
streets need to be repaired or replaced. While the state's water
system received some funding in 2014, more is needed to meet the
state's demands.
   (g) On a local level, 70 percent of Los Angeles' water
infrastructure is composed of cast-iron pipes, most of which was laid
during the early half of the 20th century.
   (h) Our financial commitment to kindergarten and grades 1 to 12,
inclusive, education has waned. Average Daily Attendance grew
anemically by 0.06 percent annually between 2007 and 2011. By 2011,
California ranked 43rd in per pupil spending and California's ADA was
$2,580 less than the United States average -- the largest gap in 40
   (i) California's commitment to higher education has also receded.
In addition to opening professional and economic doorways for
students, California's higher education system is one of our most
important economic engines. With almost 60 faculty and researchers
who have won the Nobel prize, the University of California has over
3,200 active patents and contributes $33 billion to the California
economy annually. The California State University generates an
additional $17 billion in economic activity and supports 150,000 jobs
in the state. Despite its proven value, California has not been able
to maintain higher education accessibility for its residents. In the
past 20 years, University of California fees have increased by 434
percent and California State University fees by 300 percent.
Moreover, California community colleges, the largest provider of
workforce training in the nation, increased fees by 130 percent
between 2008 and 2012, leading to over a 20 percent decline in
   (j) The lack of investment in infrastructure and education has
diminished opportunities for Californians and continues to fuel the
growing income inequality in California. Since 1970, the poorest 20
percent of Californians have seen their household income grow by just
3.1 percent while the income of the richest 20 percent has climbed
74.6 percent. Since 1987, 71.3 percent of all the gains generated by
California's economy have gone to the state's wealthiest 10 percent.
Moreover, today, California accounts for three of the 10 American
cities with the greatest disparities in wealth--San Francisco,
Oakland, and Los Angeles.
   (k) (1) The Upward Mobility Act would help ensure California's
residents and businesses can thrive in the 21st century global
economy by increasing funding by $10 billion dollars for the
following programs, as the revenue becomes available:
   (A) Three billion dollars to K-14 education. Investing in its
residents through education is the foundation on which California has
always built its economy. This measure would provide new funds to
help rebuild California's education system at every level. The new
revenues will help to rebuild classrooms and be available to help
protect classroom spending from pending pension fund demands.
   (B) Two billion dollars to the University of California and the
California State University. Similarly, the measure would restore
investment in California's prized higher education system, essential
to upward mobility for Californians. Revenues would be split evenly
between the University of California and the California State
   (C) Three billion dollars to local governments. Investing in local
governments will more closely connect Californians to the government
spending that occurs on their behalf and support the new realignment
burdens on local government. Moreover, additional guaranteed funding
to provide additional public safety, parks, libraries, or local
development, will allow local governments to best meet the specific
needs of their particular communities.
   (D) Two billion for a new earned income tax credit for low-income
families. The Upward Mobility Act would establish a refundable earned
income tax credit to help low-income families offset the burden of
the proposed sales and use tax on services.
   (E) Small business and minimum wage relief. This measure would
enhance the state's business climate, create jobs, and incentivize
entrepreneurship by evaluating the current corporate income tax to
determine whether it is meeting its intended purpose while at the
same time linking changes to a more reasonable minimum wage.
   (2) Because this funding would be guaranteed, school districts,
community colleges, the California State University, the University
of California, and local governments would be able to securitize the
revenues to make essential long-term investments, just as is the case
with real property taxes.
   (l) The Upward Mobility Act will fund these programs to enable the
upward mobility of our residents and to help make California's
businesses more competitive by modernizing our tax code. The
underlying problem is, while California's economy has evolved, its
tax system failed to keep up with the times. Over the past 60 years,
California has moved from an agriculture and manufacturing based
economy to a services based economy. As a result, state tax revenues
have become less reliant on revenues derived from the Sales and Use
Tax on goods and more reliant on revenues derived from the Personal
Income Tax. In 1950, the Sales and Use Tax comprised 61 percent of
all state revenues; today, it accounts for about 30 percent. The
Personal Income Tax accounted for 12 percent of total state revenues
in 1950; today, it accounts for more than 60 percent.
   (m) Moreover, California's General Fund tax collections are
heavily dependent on the earnings of its top earners. This has led to
dramatic revenue swings year over year. During the dot-com economic
boom of the 1950s through the early part of the 21st century, state
revenues soared by as much as 20 percent in a single year. However,
as personal incomes tumbled during the Great Recession, state
revenues plummeted disproportionately. These swings in revenue have
led to the suffering of California's residents. Essential services,
such as health care and child care for low-income families, were cut
at a time when they were needed most. In addition, the state cut
billions of dollars to education, including adult vocational and
literacy education, which could have helped low-income families
recover from the recession. Relying on the wealthiest taxpayers to
support California's needs is outdated and dangerous fiscal policy.
Not only does it increase the uncertainty of tax collections, but
there is evidence that California's high tax rates may be driving
high income earners out of the state, which only deepens revenue
   (n) The economy has shifted away from the production of goods to
services. Since 1966 sales of taxable goods, as a share of the
economy, have been cut in half. Today services represent 80 percent
of California's economy. Expanding the Sales and Use Tax to cover
services removes a significant inequitable aspect of the tax code,
implicitly favoring consumer spending on services over goods.
Currently the sale of a TurboTax software disk is taxed, whereas a
consumer who instead paid H&R Block would escape taxation. In
essence, those who produce goods such as software or machinery are
supporting those who produce services and information. Taxing only
goods and not services when our economy has been so fundamentally
transformed makes no sense and is manifestly unfair. This has to
   (o) The Upward Mobility Act seeks to make three broad changes to
the tax code:
   (1) Broaden the tax base by imposing a sales tax on services to
increase revenues. Local jurisdictions would not be authorized to
increase sales tax on services, as they now can do with the sales tax
on goods. Though the new revenues would be collected by the state,
the ownership of those funds allocated to local government under this
measure will be controlled by local government using traditional
allocation mechanisms. Health care services and education services
would be exempted from the tax, and very small businesses with under
$100,000 gross sales would be exempted from the sales tax on
   (2) Enhance the state's business climate and incentivize
entrepreneurship and business creation by evaluating the corporate
income tax to determine whether it is meeting its intended purposes,
including whether it is born equitably among California's businesses
and what impact it has on the business climate, while at the same
time linking changes to a more reasonable minimum wage.
   (3) Examine the impacts of lowering and simplifying the Personal
Income Tax while maintaining progressivity. The measure's goal is to
reduce the income tax rates imposed under the Personal Income Tax for
low-and middle-class-income households so that families earning
$100,000 pay only $1,000. The income tax rate for top earners may
also be reduced in a manner that balances fairness with mitigating
adverse impact to both state revenues and competitiveness. The
obligation of top earners with regard to other tax obligations for
top earners, including Proposition 63, would remain intact.
   (p) In order to ensure fiscal responsibility, the Upward Mobility
Act's revenue reduction provisions would be phased in only when it is
clear that new revenues are sufficient to replace any revisions to
the personal income tax and corporate tax.
   (q) As the revenues secured by Proposition 30 expire, California
policy decisionmakers must determine new long term ways to provide
for state residents. The Upward Mobility Act will increase
opportunities for California's businesses and create an upward
mobility ladder for California residents. Moreover, the Upward
Mobility Act will realign the state's outdated tax code with the
realities of California's 21st century economy.