By Mark Wolf
When you buy a tree at a nursery you pay sales tax in 45 states. When you hire someone to prune that tree, you don't pay sales tax on that transaction in most states. Buy a dishwasher at a big box store and you'll pay sales tax. Pay a plumber when that dishwasher floods your kitchen? Again, most states don't tax that.
States should be looking at ways of expanding their sales tax long term as the nation moves to a more service economy, Scott Drenkard of the Tax Foundation, told a Legislative Summit session on "Is Taxation of Services Inevitable?"
Sales taxes, he said, began in the 1930s because the Depression depressed property values and, with it, taxes collected on property. State reliance on sales taxes have climbed steadily since then. For example, Texas gets 36 percent of its revenue from sales tax, he said.
Transactions, said Drenkard, have shifted from almost two-thirds goods to two-thirds services and if states want a tax that applies to final consumption they must make sure they are taxing all goods and services. Most of the 45 states that have sales taxes exempt an array of goods and services.
For example, 33 states exempt groceries, 45 exempt prescription drugs and 24 don't tax periodicals. On the services side, 43 exempt financial services, 33 exempt fitness clubs and 42 don't tax barber and hair salon services.
Service taxes, which tend to attract formidable foes, can have political downsides. Florida passed, then repealed a tax on services but Mazaroff, who had a brief role in the Netflix political drama "House of Cards" in 2014, praised North Carolina's tax on services, which took effect last year, part of a Republican-led shift to lower income taxes by expanding the number of services subject to sales taxes.
Michael Mazerov, of the Center on Budget and Policy, said the "biggest structural flaw in the sales tax is exempting services."
Extending the tax to services, he said, inceases the fairness of the tax and has an immediate revenue impact. Because low-income people also have to consume services, he said the rate should be lowered and/or or the Earned Income Tax Credit increased.
Maureen Riehl, of MultiState Associates Inc., whose firm represents the Professional Services Alliance, which opposes taxing services, said 44 bills were introduced this year in 24 states, a high-water mark.
"It's not an easy thing to do," said Riehl, citing several states that enacted, then repealed, service taxes. Sales taxes, "were designed only to be done on tangible personal property. It's very diffult on sellers of services." Riehl said there is a "very fuzzy line about where yo're going to draw that" and that states need to get very serious about solving sales collection problems before they start expanding the base.