Not Many Smiling About This Potential Service Addition

It’s come up a few times over the years, and the Indiana Chamber has been successful in helping to swiftly swat it away. It is becoming a common topic in many states as revenues have continued to plummet. It is … a sales tax on services.

The list of services is long and varied — from hair cuts and funerals to accounting and legal help. When it’s businesses working with other businesses, it gets even more complicated. Yes, states want more tax revenue, but do they benefit from putting policies in place that hurt companies and, in many cases, individual consumers.

Other questions — if states wish to opt for any additional taxes at all: What services are exempted? Do you lower the overall tax rate and, if so, how much? Will such taxes send people over state lines where the same services may be tax-free? has a look at the latest. Full story here, and some excerpts below:

With tax revenues at a historic low and federal stimulus dollars drying up, states like Michigan and Pennsylvania are eying adding a sales tax to some of the 180 services that states could be taxing, ranging from pet grooming and dating services to dental and legal services. The change would be a fundamental shift in states’ tax systems, but the proposals are already running into stiff opposition from the business community.
States have long taxed goods, like cars and appliances, since the 1930s, bringing in nearly 35 percent of the general revenue for the 45 states that have a sales tax. (Alaska, Delaware, Montana, New Hampshire and Oregon don’t have one.)
But the shift in the U.S. economy from producing goods to services has meant fewer tax dollars flowing into states that have been slow to tap the service pool. Hawaii, New Mexico, South Dakota and Washington state tax more services than other states, according to the most recent data available.
California, Illinois, Massachusetts and Virginia probably could increase their sales tax revenue by more than a third if they broadly taxed services purchased by households, such as landscaping services, health club memberships and car washes, according to Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, a Washington, D.C., group that examined states’ options for expanding sales taxes on services in a 2009 report.

A handful of states, among them Arkansas, Connecticut, Ohio and Nebraska, did levy sales taxes on additional services as they began to recover from the 2001 recession, but the changes were largely incremental, not comprehensive like the plans in Michigan and Pennsylvania.
States back then took the slow approach because taxing services is politically explosive and a few well-publicized debacles have made others leery of trying. Florida, for example, passed a far-reaching tax on most personal and business services in 1987 only to repeal it the following year because of intense business opposition. Massachusetts approved a sales tax on certain services in the summer of 1990, and it was canned by the following spring. And more recently, Maryland in 2007 added what was dubbed the “tech tax,” which was rescinded before it took effect after the computer industry mounted an aggressive campaign against it.