Amended in Senate February 10, 2015

Senate BillNo. 8

Introduced by Senator Hertzberg

December 1, 2014

An actbegin insert to add Chapter 3.8 (commencing with Section 6305) to Part 1 of Division 2 of the Revenue and Taxation Code,end insert relating to taxation.


SB 8, as amended, 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 climatebegin delete andend deletebegin insert,end insert would incentivize entrepreneurship and business creation by evaluating thebegin delete Corporate Tax Law,end deletebegin insert corporate tax,end insert and would examine the impacts of a lower and simplerbegin delete Personal Income Tax Law.end deletebegin insert personal income tax.end insert

begin insert

This bill would, on and after January 1, ___, expand the Sales and Use Tax Law to impose a tax on the gross receipts from the sale in this state of, or the receipt of the benefit in this state of services at a rate of ____%.

end insert

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

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

P2    1


The Legislature finds and declares all of the

3(a) California has long been known as the land of opportunity,
4the republic of the future. But for too many of its residents the
5future is receding. Inequality continues to rise -- even though
6California has one of the most progressive tax structures in the

8(b) Something more is needed; a new philosophy of governance
9that focuses on the overall progressive outcome that can be
10achieved through modernizing our tax system and investing in the
11means of upward mobility, above all job creating infrastructure
12and public higher education for our increasingly youthful

14(c) Beyond these foundations, building and sustaining a middle
15class means new jobs with good wages. Small businesses, like
16plumbing contractors, auto repair shops, and restaurants that
17account for over 90 percent of the state’s businesses and well over
18a third of all jobs, are a key rung on the ladder of upward mobility.
19They need a tax policy that will enable them to grow and add

21(d) California’s two trillion dollar economy has shifted from
22being mainly agricultural and manufacturing in the 1950s and
231960s, when the framework of today’s tax system was set, to one
24based on information and services, which now accounts for 80
25percent of all economic activities in the state. To achieve a future
26as promising as California’s past, we need a tax system that is
27based on this real economy of the 21st century while ensuring that
28new revenue is invested in strengthening the ladder of mobility
29for all our residents.

30(e) California of the 1950s and 1960s was governed with an eye
31towards the future and was renowned for the opportunities that it
32created for its residents. California’s water system was born during
33that era and transformed the desert into fertile agricultural land
34that not only fed Californians but the world. California also
35constructed its freeway system to more rapidly and safely move
P3    1people and goods through the state as California became the
2gateway to the Pacific Rim. California’s higher education system
3was the envy of all, reaching new heights as the University of
4California and the California State University grew by six and
5eight campuses respectively between 1958 and 1965. California’s
6investment in infrastructure and education paid off as agriculture,
7aerospace, and then technology boomed and drove California into
8the 21st century as the fifth largest economy in the world. As
9businesses thrived, they created an abundance of middle class jobs
10that enabled Californians to capitalize on new opportunities to
11better the standard of living for themselves and their families.

12(f) As California’s economy thrived, however, its eye on the
13future wavered. By the late 1970s, state and local finances became
14intertwined; the state increasingly used its funds to support
15traditionally local operations and both state and local governments
16pulled back on the types of investments needed to help businesses
17and residents succeed. Today, Californians live with the
18investments made more than three generations ago. Fifty-five
19percent of our local streets need to be repaired or replaced. While
20the state’s water system received some funding in 2014, more is
21needed to meet the state’s demands.

22(g) On a local level, 70 percent of Los Angeles’ water
23infrastructure is composed of cast-iron pipes, most of which was
24laid during the early half of the 20th century.

25(h) Our financial commitment to kindergarten and grades 1 to
2612, inclusive, education has waned. Average Daily Attendance
27grew anemically by 0.06 percent annually between 2007 and 2011.
28By 2011, California ranked 43rd in per pupil spending and
29California’s ADA was $2,580 less than the United States average
30-- the largest gap in 40 years.

31(i) California’s commitment to higher education has also
32receded. In addition to opening professional and economic
33doorways for students, California’s higher education system is one
34of our most important economic engines. With almost 60 faculty
35and researchers who have won the Nobel prize, the University of
36California has over 3,200 active patents and contributes $33 billion
37to the California economy annually. The California State University
38generates an additional $17 billion in economic activity and
39supports 150,000 jobs in the state. Despite its proven value,
40California has not been able to maintain higher education
P4    1accessibility for its residents. In the past 20 years, University of
2California fees have increased by 434 percent and California State
3University fees by 300 percent. Moreover, California community
4colleges, the largest provider of workforce training in the nation,
5increased fees by 130 percent between 2008 and 2012, leading to
6over a 20 percent decline in enrollment.

7(j) The lack of investment in infrastructure and education has
8diminished opportunities for Californians and continues to fuel
9the growing income inequality in California. Since 1970, the
10poorest 20 percent of Californians have seen their household
11income grow by just 3.1 percent while the income of the richest
1220 percent has climbed 74.6 percent. Since 1987, 71.3 percent of
13all the gains generated by California’s economy have gone to the
14state’s wealthiest 10 percent. Moreover, today, California accounts
15for three of the 10 American cities with the greatest disparities in
16wealth--San Francisco, Oakland, and Los Angeles.

17(k) (1) The Upward Mobility Act would help ensure California’s
18residents and businesses can thrive in the 21st century global
19economy by increasing funding by $10 billion dollars for the
20following programs, as the revenue becomes available:

21(A) Three billion dollars to K-14 education. Investing in its
22residents through education is the foundation on which California
23has always built its economy. This measure would provide new
24funds to help rebuild California’s education system at every level.
25The new revenues will help to rebuild classrooms and be available
26to help protect classroom spending from pending pension fund

28(B) Two billion dollars to the University of California and the
29California State University. Similarly, the measure would restore
30investment in California’s prized higher education system, essential
31to upward mobility for Californians. Revenues would be split
32evenly between the University of California and the California
33State University.

34(C) Three billion dollars to local governments. Investing in local
35governments will more closely connect Californians to the
36government spending that occurs on their behalf and support the
37new realignment burdens on local government. Moreover,
38additional guaranteed funding to provide additional public safety,
39parks, libraries, or local development, will allow local governments
40to best meet the specific needs of their particular communities.

P5    1(D) Two billionbegin insert dollarsend insert for a new earned income tax credit for
2low-income families. The Upward Mobility Act would establish
3a refundable earned income tax credit to help low-income families
4offset the burden of the proposed sales and use tax on services.

5(E) Small business and minimum wage relief. This measure
6would enhance the state’s business climate, create jobs, and
7incentivize entrepreneurship by evaluating the current corporate
8income tax to determine whether it is meeting its intended purpose
9while at the same time linking changes to a more reasonable
10minimum wage.

11(2) Because this funding would be guaranteed, school districts,
12community colleges, the California State University, the University
13of California, and local governments would be able to securitize
14the revenues to make essential long-term investments, just as is
15the case with real property taxes.

16(l) The Upward Mobility Act will fund these programs to enable
17the upward mobility of our residents and to help make California’s
18businesses more competitive by modernizing our tax code. The
19underlying problem is, while California’s economy has evolved,
20its tax system failed to keep up with the times. Over the past 60
21years, California has moved from an agriculture and manufacturing
22based economy to a services based economy. As a result, state tax
23revenues have become less reliant on revenues derived from the
24Sales and Use Tax on goods and more reliant on revenues derived
25from the Personal Income Tax. In 1950, the Sales and Use Tax
26comprised 61 percent of all state revenues; today, it accounts for
27about 30 percent. The Personal Income Tax accounted for 12
28percent of total state revenues in 1950; today, it accounts for more
29than 60 percent.

30(m) Moreover, California’s General Fund tax collections are
31heavily dependent on the earnings of its top earners. This has led
32to dramatic revenue swings year over year. During the dot-com
33economic boom of thebegin delete 1950send deletebegin insert 1990send insert through the early part of the
3421st century, state revenues soared by as much as 20 percent in a
35single year. However, as personal incomes tumbled during the
36Great Recession, state revenues plummeted disproportionately.
37These swings in revenue have led to the suffering of California’s
38residents. Essential services, such as health care and child care for
39low-income families, were cut at a time when they were needed
40most. In addition, the state cut billions of dollars to education,
P6    1including adult vocational and literacy education, which could
2have helped low-income families recover from the recession.
3Relying on the wealthiest taxpayers to support California’s needs
4is outdated and dangerous fiscal policy. Not only does it increase
5the uncertainty of tax collections, but there is evidence that
6California’s high tax rates may be driving high income earners out
7of the state, which only deepens revenue shortfalls.

8(n) The economy has shifted away from the production of goods
9to services. Since 1966 sales of taxable goods, as a share of the
10economy, have been cut in half. Today services represent 80
11percent of California’s economy. Expanding the Sales and Use
12Tax to cover services removes a significant inequitable aspect of
13the tax code, implicitly favoring consumer spending on services
14over goods. Currently the sale of a TurboTax software disk is
15taxed, whereas a consumer who instead paid H&R Block would
16escape taxation. In essence, those who produce goods such as
17software or machinery are supporting those who produce services
18and information. Taxing only goods and not services when our
19economy has been so fundamentally transformed makes no sense
20and is manifestly unfair. This has to change.

21(o) The Upward Mobility Act seeks to make three broad changes
22to the tax code:

23(1) Broaden the tax base by imposing a sales tax on services to
24increase revenues. Local jurisdictions would not be authorized to
25increase sales tax on services, as they now can do with the sales
26tax on goods. Though the new revenues would be collected by the
27state, the ownership of those funds allocated to local government
28under this measure will be controlled by local government using
29traditional allocation mechanisms. Health care services and
30education services would be exempted from the tax, and very small
31businesses with under $100,000 gross sales would be exempted
32from the sales tax on services.

33(2) Enhance the state’s business climate and incentivize
34entrepreneurship and business creation by evaluating the corporate
35income tax to determine whether it is meeting its intended
36purposes, including whether it isbegin delete bornend deletebegin insert borneend insert equitably among
37California’s businesses and what impact it has on the business
38climate, while at the same time linking changes to a more
39reasonable minimum wage.

P7    1(3) Examine the impacts of lowering and simplifying the
2begin delete Personal Income Taxend deletebegin insert personal income taxend insert while maintaining
3progressivity. The measure’s goal is to reducebegin delete the income tax rates
4imposed under the Personal Income Taxend delete
begin insert personal income tax ratesend insert
5 for low-and middle-class-income households so that families
6earning $100,000 pay only $1,000. The income tax rate for top
7earners may also be reduced in a manner that balances fairness
8with mitigating adverse impact to both state revenues and
9competitiveness. The obligation of top earners with regard to other
10tax obligations for top earners, including Proposition 63, would
11remain intact.

12(p) In order to ensure fiscal responsibility, the Upward Mobility
13Act’s revenue reduction provisions would be phased in only when
14it is clear that new revenues are sufficient to replace any revisions
15to the personal income tax and corporate tax.

16(q) As the revenues secured by Proposition 30 expire, California
17policy decisionmakers must determine new long term ways to
18provide for state residents. The Upward Mobility Act will increase
19opportunities for California’s businesses and create an upward
20mobility ladder for California residents. Moreover, the Upward
21Mobility Act will realign the state’s outdated tax code with the
22realities of California’s 21st century economy.

23begin insert

begin insertSEC. 2.end insert  

end insert

begin insertChapter 3.8 (commencing with Section 6305) is added
24to Part 1 of Division 2 of the end insert
begin insertRevenue and Taxation Codeend insertbegin insert, to read:end insert

begin insert


26Chapter  begin insert3.8.end insert Services



begin insert6305.end insert  

In addition to the taxes imposed by this part, for the
29privilege of selling services at retail a tax is hereby imposed upon
30all retailers at the rate of ____ percent of the gross receipts of any
31retailer from the sale of all services sold at retail in this state on
32or after January 1, ____.


begin insert6306.end insert  

In addition to the taxes imposed by this part an excise
34tax is hereby imposed on the receipt of the benefit of the service
35in this state of services on or after January 1, ____, at the rate
36specified in Section 6305 of the sales price of the services.

end insert