March 19, 2007

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.


At 12:56 PM, Blogger Tom said...

Last week Pinellas County Florida voted for a 1% sales tax which will go on top of the state 6% sales tax. It will bring in $2 billion over 10 years. This was timed for an off year low turnout election.

There was no visible opposition until the last weeks before the election while the government and government contractors funded a massive pro tax campaign.

Progressives watched from the sidelines or actively supported the tax.

In my opinion the local Pinellas "good government" crowd have long ago given up on a fair tax system and support taxes that victimize the poor as the only way to fund services. Wasteful spending is ignored as the price to be paid for meager services to the needy. Under Jeb Bush we have accepted a “pay for play” system where government venders and contractors and their lobbyists “kick back” a part of their contract to the Republican Party and to relatives of elected officials.

The state legislature has seen the success of this Pinellas tax as a signal to push for a new 2 1/2% sales tax to fund tax relief for property owners.

Florida has had a progressive local property tax structure with modest homes (up to $25,000 value) exempt from taxes. Inflation and rising user fees have eroded that benefit to low wage Floridians.

With Republicans in control of all branches of Florida government they see this year as their best opportunity to end all progressive features in out tax structure.


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