Skip to content

Sales Tax Base Expansion Proposals Rising

2 min readBy: Joseph Bishop-Henchman

Piggybacking on the post below about Pennsylvania Governor Ed Rendell’s proposal to expand the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , I wanted to highlight two great articles on the subject.

First, this article from the Wall Street Journal looks at what is becoming a trend of proposals to expand the sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. to services:

The consumption of services, at about $6.1 trillion a year, accounts for about two-thirds of total consumer spending, yet services aren’t widely taxed by state and local governments. This is rooted partly in history: Sales taxes in the U.S. began to spread around 75 years ago when the service sector was a smaller share of the economy, and legislators have generally found it easier to raise existing sales tax rates than to extend the tax to new areas.

As the service sector’s share of the economy has grown, so has its influence. “Whenever you [propose a service tax] everybody who is in that profession shows up in the lobby and protests it,” said William F. Fox, a University of Tennessee economist. “That proves extremely difficult to overcome.”[…]

Services aren’t the only potential source of new tax revenue. Cities and states across the country have pushed levies on everything from sugary sodas to grocery bags. But with revenue sinking, state and local governments are scrambling for funds—and the service sector is a tempting target.

Second, this article from Manhattan Institute scholar (and former Tax Foundation economist) Josh Barro:

Sales tax is intended to be a consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. , and an ideal consumption tax is applied to all consumption, exactly once, at the same rate. Such a tax is said to be neutral: not creating tax advantages for particular products, industries, or corporate structures.[…]

Services make up approximately two-thirds of our consumer economy, but most states apply sales tax to few or no services. They also often exclude “necessity” goods from sales tax bases, including grocery food, clothing, and medicine.

Meanwhile, states tax some intermediate sales between businesses. The Council on State Taxation (a trade group for multistate businesses, including retailers), estimates that 44% of sales taxes are paid by businesses, not consumers. (The COST study includes gross receipts taxes that intentionally apply to intermediate sales, but even traditional sales taxes include significant intermediate taxation.) These taxes become a component of consumer sale prices, a phenomenon known as “tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. .” So, much consumption is double – or triple – taxed while most consumption goes untaxed entirely.[…]

With 48 states facing budget deficits, many legislators simply want to broaden the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. without offsetting tax cuts. Unlike Maine’s initiative, this isn’t pro-growth tax reform. However, it is preferable to many other options that legislatures consider to raise more revenue.[…]

Where a tax increase is politically inevitable, it’s better to choose one that imposes less economic damage, has at least some impact on all taxpayers, and reduces the economic distortions of taxation. Extending sales taxes to services can fit this bill.

The full piece is worth a read. Check it out here.