Paul L. Caron

Thursday, December 31, 2020

Why States Should Consider Expanding Sales Taxes To Services, Part 2

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):

Tax Notes StateAs 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.

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The states that "need revenue" should rethink how they are spending taxpayer funds. Most states requiring the increased revenue due to COVID shut down the very businesses they seek to add tax on. Most have high taxes to begin with. If consumers can get the services subject to sales tax in a neighboring state that does not charge the tax consumers will either go to that state to obtain the service or move because they are paying more tax. The businesses will suffer because they cannot make up the difference in loss of revenue and increased overhead due to administrative costs inherent with sales tax. Again, the authors have not considered the total picture. A problem in general with Ivy Tower elites.

Posted by: DSO | Jan 1, 2021 11:05:00 AM

Where I agree that broadening the tax base by including services makes sense, it would be worthwhile to also amend sales tax laws to ensure that private consumption is taxed and not business inputs. The advantage of VAT lies in its success to remove the tax burden from business expenditure through teh input tax credit system. US sales taxes succeed in that respect only partially due to the limited scope of the exemptions. As a result, the sales tax is a hybrid tax, partially a consumption sales tax and partially a gross receipt tax. Broadening the base without also expanding the scope of the exemptions is putting the horse behind the wagon.

Posted by: Robert F. W. van Brederode | Dec 31, 2020 3:19:15 PM

Part 3: Why States Should Exempt Legal Services From Sales Tax

Posted by: Anon | Dec 31, 2020 5:45:23 AM