In 2016, California voters overwhelmingly approved Proposition 51, authorizing $9 billion in taxpayer-funded bonds to construct and modernize new schools. Spending these dollars effectively and efficiently is critical to achieving the goals of Proposition 51.

However, the California Foundation for Commerce and Education (CFCE) report found that imposing a 5% sales tax on services would drive up the average cost of constructing a new school by more than $17 million, due to the numerous business services that play a role in the construction of a new school.

That represents a cost increase of 2.3% on school construction from a tax designed to target businesses rather than schools.

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 school construction and modernization can range from 6.1% (construction) to 8.13% (finance) due to pyramiding.