New York Times on Expanding Sales Taxes to Services

March 29, 2010

The New York Times on Sunday had a well-researched piece on the expansion of state sales taxes to services:

In the scramble to find something, anything, to generate more revenue, states are considering new taxes on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns.[…]

In Nebraska, a lawmaker has introduced a bill to tax armored car services, farm equipment repairs, shoe shines, taxidermy, reflexology and scooter repairs. In Kentucky, Jim Wayne, a state representative, and some fellow Democrats are proposing taxing high-end services: golf greens fees, limousine and hot-air-balloon rides, and private landscaping.

In June, voters in Maine will decide whether to accept a state overhaul of its tax system that would newly tax services like tailor alterations, blimp rides, and entertainment provided by clowns, comedians and jugglers.

Yours truly weighed in:

In the 1930s, with property tax revenues shrinking because of the Great Depression, states began taxing the sales of items. It was simple, and at the time, the tax matched an economy largely based on goods.

But as the nation’s economy shifted to one focused more on services, the tax system mostly did not budge. And so, in 2009, states raised $230 billion in sales taxes; had they taxed all services, too, according to Joseph Henchman of the Tax Foundation, a nonpartisan research group, they might have raised twice that.

Advocates say taxing services is simply a matter of fairness and good sense, and of spreading out the tax burden as widely as imaginable. If you pay tax for a ring, why should you be exempt from paying it for a manicure? But even those who agree in principle wrestle with the details. Should a bakery be taxed for the accounting work or lawn care it gets, only to pass along that cost to its customers in the price of cookies? Some in the world of taxes would describe that as pyramiding. And what to do about all the industries that would, naturally, line up for exemptions?

Most economists say the ideal sales tax is imposed on every final sale of goods and services, once and only once. But state sales taxes today have exempted a majority of most services and many goods (most popular exemptions including groceries, prescription drugs, and clothing). So to raise the same amount of revenue, the rate on everything else must be higher. Also, a number of business-to-business transactions are taxed, resulting in economic distortions and pyramiding.

It will be interesting to see how these proposals fare. People may not stomach any revenue increase, however it’s framed. And unless a state is willing to tackle many exemptions at once with a rate reduction, it may not get political momentum.

Check out the full article here.

More on sales taxes here.


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