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A proposed tax that shouldn't happen

June 05, 2012

In Assembly Bill 2540, Burbank Assemblyman Mike Gatto has proposed introducing sales taxes for specified services. The specified services tend to be consumed by individuals with higher incomes and include, among other things, yacht and boat repair, astrology, tarot and palm reading, limousine rental, nonmedical massage, watch repair, access to the facilities of a ski resort, and access to live theater productions.

When you impose a sales tax, the seller is faced with a choice: “Do I lower my prices to incur most of the tax, or do I try to pass it off to consumer?” The decision is determined by relative ease with which I, as a seller, can avoid the tax by offering other non-tax services versus the ease with which the consumer can purchase other non-tax services (also known as tax incidence).

Unfortunately, many of the services that Gatto proposes be taxed are provided by specialized sellers who likely cannot provide other services, while the rich customers Gatto wishes to tax could easily avoid the sales tax by purchasing other goods/services or by making out-of-state purchases.

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For example, a wealthy person can go to ski resorts in Nevada, Utah and elsewhere, thus they have lots of ways to avoid a tax on California ski resorts. But the ski resort doesn’t have the same alternative opportunities to generate revenue. As a result you would expect the ski resort, and its employees, to bear the lion’s share of this tax.

Unfortunately, the brunt of Gatto’s tax will likely fall on lower- and middle-income watch repairmen, limousine drivers, masseuses, tarot card readers, ski resort employees and boat repairmen.

Ryan Welsie Ford

Burbank

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