Sales Tax Base Expansion: The Future of the Sales Tax?

Sales taxes are an important revenue source for almost every state in the US. However, in recent years, these taxes have been showing their age. When the majority of the state sales taxes were created in the 1930s, the majority of purchases made were on on physical goods, like a telephone or a radio. By 2003, in contrast, sixty percent of personal consumption was spent on services, but most states don't apply the sales tax to services. This omission hurts not just the states' financial stability , but also the fairness of their tax codes. It's probably not fair, for example, that in most states people who do their own laundry pay sales taxes when they buy a washer or dryer (a physical good), but people who have their clothes laundered by someone else (a service) pay no sales taxes at all.

The more goods and services the state sales tax applies to, the lower the sales tax rate can be to generate any given level of revenue. The political ramifications of taking on previously untaxed service businesses may make some policymakers wary. Nonetheless, as states shift from manufacturing economies to service economies, it's essential that tax structures change, too. Thankfully, some far-sighted lawmakers have seen the need for this important tax reform measure. Several proposals in states across the country look to include at least some services in the state sales tax base.

One component of an overall tax proposal in Maine would expand the sales tax base to include a variety of personal and real property services. In Maryland, a state house committee on Wednesday debated House Bill 448, which would expand the sales tax base to include luxury services like interior decorating and other personal services. In Michigan, Governor Jennifer Granholm has also proposed a measure to expand the sales tax base. Expect more states to follow in this increasingly popular (and long overdue) reform for tax adequacy and fairness. For more on the benefits of expanding the tax tax base, check out ITEP's policy brief.