Thursday, December 31, 2020
Gladriel Shobe (BYU), Grace Stephenson Nielsen (J.D. 2021, BYU), Darien Shanske (UC-Davis) & David Gamage (Indiana), Why States Should Consider Expanding Sales Taxes to Services, Part 2, 99 Tax Notes State 4 (Jan. 4, 2021):
As we explained in our prior essay, state governments are experiencing severe revenue needs because of COVID-19, and expanding state sales tax bases to include services is a promising option for state governments to manage their budget shortfalls. In this, the second essay in this series — a contribution to Project SAFE: State Action in Fiscal Emergencies — we explain some of the implementation details and options for how states might go about expanding their sales tax bases to include services. In particular, we argue that there are some incremental steps that seem to be technically and politically feasible as responses to the current crisis. In particular, we argue the states should start by expanding their sales taxes to include services that are least problematic as a matter of policy and politics.
Most states could add significant revenue to their tax bases by taxing services at a time when additional revenue is sorely needed. But state governments should be careful to avoid taxing business inputs, as our planned third essay in this series will elaborate. Also, state governments might consider delaying taxing services that were harmed by the pandemic. Although any proposal for new taxes will face resistance from the affected constituencies, proposals that are careful to tax personal consumption are more likely to succeed and could help states close budget gaps while minimizing spending cuts that disproportionately affect vulnerable populations.