California’s roads and infrastructure are in dire need of repair. In 2017, the Legislature passed Senate Bill 1 (SB 1), the Road Repair and Accountability Act, to provide billions in needed funding. And in 2018, state voters decisively rejected Proposition 6, an effort to undo SB 1 and its much-needed funding for transportation and infrastructure projects. Spending SB 1 funds and other transportation and infrastructure dollars effectively and efficiently is critical to meeting our state’s infrastructure needs.
However, the California Foundation for Commerce and Education (CFCE) report found that imposing a 5% sales tax on services would drive up the cost of SB 1-funded projects by $149 million in 2019-20 alone, due to the numerous business services that go into every infrastructure project. Even more concerning, SB 1 only represents a portion of state transportation funding.
When business inputs like professional services are taxed, pyramiding of those expenses up the production chain compounds the cost of the tax. The CFCE report found that the effective tax rate of a 5% sales tax on business services in key economic sectors related to infrastructure can range from 6.1% (construction) to 8.13% (finance) due to pyramiding.
A sales tax on services would increase the cost of infrastructure projects and erode the value of taxpayer dollars intended for transportation and infrastructure. For SB 1-funded projects alone, a sales tax on business services would prevent $1.5 billion worth of projects from being completed over the next decade.
Practically, a sales tax on services would take dollars intended for transportation and steer them to other General Fund priorities.