States eye services taxes for first time
posted at 10:55 am on April 1, 2010 by Ed Morrissey
States have applied sales taxes to almost every good sold within them, although some (like Minnesota) don’t tax staples like milk and clothing. In general, they have avoided taxing services, in part because of the lack of physical exchange as a focus point for the transaction. ABC News reports that desperate times are apparently calling for desperate measures, as states look to right their ledgers:
Cash-strapped states across the country are looking to their cash-strapped residents for even more money — by taxing services they buy, not just goods. Everything from car repairs and dry cleaning to personal training and party clowns are being targeted for new taxes.
Personal Trainer Kelly Garner is outraged, telling ABC News, “another tax is not what we need right now.” State budget officers disagree.
The new taxes are hitting citizens of states across the country. Hawaii, New Mexico, Washington, South Dakota and Delaware already tax a number of services. Other states are quickly following their lead.
Nebraska lawmakers are considering new taxes on everything from shoe shines to farm equipment repairs. In Kentucky, the state is considering taking a cut of lawn services and limousine rides. Maine could decide to tax the fun out of performers like clowns and jugglers. And, in Pennsylvania, accountants and even plumbers could have their labor visited by the tax man for the first time ever.
Consumers do two-thirds of their spending on services, and with massive budget deficits, state governments say they can’t afford not to consider another source of revenue.
Let’s get the obvious out of the way, which is this: states need to start looking for reductions to make in their own spending, not find ways to suck even more out of the economy. The service sector has already been hammered by the Great Recession. Sticking a new load of sales taxes on top of it will only slow its recovery, while pulling capital out of the market will make future expansion less likely.
With that being said, what is the rationale for applying sales taxes to goods but not services? Is it an issue of difficulty? Retail systems now track goods throughout the distribution chain with high degrees of accuracy (in part because of tax regulations), which makes it easy for government to take their bite. The same cannot be said for massages, lawns being mowed, rubber balls being juggled, and so on.
In fact, the traditional manner in which that got taxed was through income. Clowns don’t sell goods, but they pay tax on their income at the end of the year. So do lawn servicers, personal trainers, and masseuses. If states decided to impose sales tax, it wouldn’t be directly a double taxation, as the customer pays the sales tax, but it would make customers less likely to buy — and providers would have to keep prices a little lower as a result of the government wetting its beak.