California businesses already face a competitive disadvantage with businesses in other states due to the state’s high costs and regulations.
According to the report by the California Foundation for Commerce and Education (CFCE), imposing a 5% sales tax on services would artificially raise the cost structures of California businesses relative to firms in other states, leading to smaller company workforces, some business closures, and some business flight to other states to improve their competitiveness.
Most other states do not tax services. When business inputs like professional services are taxed, pyramiding compounds the cost of the tax up through the production chain. The CFCE report found that a 5% sales tax on services creates an average effective tax rate of approximately 1% – 3% on business service firms that purchase intermediate goods and services. California does not need another disincentive for businesses to stay in California, locate in California or grow in California.