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Few proposals generate as much agreement among economists and tax reform advocates as expanding state and local sales tax bases to include purchases of personal services. While sales taxes typically apply quite broadly to tangible goods, purchases made in the nation’s growing service sector are all too often left out of the tax base. As things currently stand, most states do not collect tax on sales of haircuts, carpet cleaning, massages, and swimming pool maintenance, to name just a few. And as we explain in an updated policy brief, these wide ranging exemptions make sales taxes less adequate, less sustainable, and less fair.
Sales taxes should treat all consumers similarly regardless of whether they prefer to spend their money on goods or on services. But implementing this ideal has proven difficult. Only a few states—including Hawaii, New Mexico, and South Dakota—currently apply their sales taxes broadly to purchases of both goods and services. Elsewhere, efforts to tax services have often been met with formidable resistance from exempt industries looking to preserve their preferential treatment. In Florida and Michigan, for example, lawmakers who approved sales tax base expansions quickly backtracked and repealed those laws following a coordinated pushback from the business community. Years later in Maine, a legislative attempt to expand the sales tax base was eventually overridden by a voter referendum supported by many businesses.
Even worse than these failures, however, are those cases where sales tax base expansion has been used to fund personal income tax cuts that have worsened the unfairness of state and local tax systems. On this front, North Carolina is the poster child. Lawmakers in the Tar Heel State recently managed to extend their sales tax to include more than 40 previously untaxed services such as car repairs and appliance installation, but only as part of a broader shift away from the income tax that loses revenue overall and exacerbates the regressive nature of the state’s tax system. If an expanded sales tax base represents one step forward for North Carolina, the income tax cuts it partially funded represent at least two steps back.
But the news on the sales tax front hasn’t been all bad. In 2012, Rhode Island expanded its sales tax base to include pet grooming and taxi fares. In 2014, the District of Columbia (DC) updated its sales tax to cover bowling alleys, car washes, carpet cleaning, and health clubs, among other services. The city’s successful inclusion of health clubs within the tax base was a particularly encouraging victory given the high-profile lobbying effort launched in opposition to this so-called “yoga tax.” And finally in Maine, the sales tax was improved just last year by adding cable TV and satellite radio services to the base.
Progress toward more rational sales taxes is continuing to take place, even if it may not be happening as quickly as some of us would like.