Upward Mobility Act to tax services, boost revenue by $10 billion

State Sen. Bob Hertzberg of the San Fernando Valley recently introduced Senate Bill 8 (SB 8), also known as the Upward Mobility Act. It is an attempt to move past standard single-issue, stopgap tax measures, and to jumpstart discussion of a complete overhaul of California’s tax code. In its current form, SB 8 would expand the sales tax to include services, while lowering both corporate and personal income taxes. Health services, education services and small businesses with less than $100,000 in gross sales would be exempt from the new service tax. Additionally, SB 8 would maintain the personal income tax’s progressive structure and would incentivize an increase to the minimum wage.

Hertzberg, a Democrat representing the 18th District, says his bill would even boost the state’s revenue by $10 billion annually, to be allocated to schools and community colleges, to the state’s two university systems, to local governments and to a new earned income tax credit for poor families. A two-thirds vote from both state legislative houses is necessary to pass any tax increase. Critics say it could hurt industries covered by the new sales tax. The Journal spoke with Hertzberg by phone to better understand his thinking, and an edited version of that conversation follows.

Jewish Journal: Why does SB 8 emphasize the sales tax over the income tax?

Bob Hertzberg: We recently had a significant economic crisis, and the governor asked the people of California to tax themselves to get the state past the crisis. That tax starts expiring at the end of this year. The question that I’m asking is, what kind of tax structure will work best for California going forward? 

The tax structure that currently exists is of a different time. The reason we are going toward a sales tax on services is that services are the dominant part of our economy. We have moved from a manufacturing economy to a service economy, and most services aren’t exportable. With the current personal income tax, a small group of wealthy people pay the bulk of the money, and it’s a very volatile revenue source for the state. We are dramatically simplifying the personal income tax from nine rates to two rates, and we are dramatically reducing it as well. We need to reimagine our tax system for the future.  

JJ: Do you think the new sales tax on services could dampen job creation and the growth of California businesses?

BH: I don’t think so. If you’re an accountant right now, there is a chance you are already outsourcing to India, because it’s cheaper. The California economy is over $2 trillion. You have to look at this holistically. On the one hand, you are going to have a new tax. On the other hand, you are going to take the corporate tax code and put it in the shredder. What happens in politics is that people look at one side of this issue and can’t see the totality of the situation. You are adding a new tax, but you are getting rid of other taxes. 

JJ: What would the effect of SB 8 be on California’s poorer residents? Would the new earned income tax credit be sufficient to offset an increase in cost for services?

BH: That’s exactly right. It will cover the cost 100 percent. We modeled it with some very smart people, including Edward Kleinbard, who served as chief of staff of Congress’ Joint Committee on Taxation, and Laura Tyson, who chaired the president’s Council of Economic Advisers under [Bill] Clinton, and they see the value of the credit. 

Also, the credit will be refundable, so you will automatically get a check. You have to apply for the existing earned income tax credit. We are going to automatically send people their credit checks. 

JJ: What are the major issues that still need to be worked out? What opposition do you foresee?

BH: I don’t know yet; it’s too early to tell. Clearly, every advocate in Sacramento who has a service business that is bellyaching is going to say that they can’t be taxed any more. It is going to take a lot of work. We are going to start the discussion in the legislature and create a process where we can get the best minds, get everyone’s opinions and then figure out what works. It will include hearings around the state. There are a whole host of thoughtful, smart people who are supportive of this plan. You engage and you find out if you made assumptions that are wrong, and if you did, you of course correct. It’s our democratic process.

JJ: Is there anything else you’d like to add regarding the aim of your bill?

BH: Before Proposition 13 [in 1978, which decreased property taxes], the tax dollars the government used to build were investment dollars. Property taxes were valuable because you could borrow against them and build a road, a school or a sidewalk. Since the proposition, the money the state has used to supplement local governments is operational money. It is not money we can use to invest. We moved away from being a society that builds infrastructure.

The first question we have to ask is, what do we want to do with the money? What’s its purpose? That is why our main focus points are education and infrastructure. If people want to rebuild a road or build a new senior center, they should be able to do it. 

Also, all of the additional money that will be raised will be going locally. There is an underlying message here of devolving power — getting money to the people. People will pay for services they can feel, touch, but when they can’t feel and touch them, they don’t want to write checks.