States are considering new taxes on virtually everything to close their budget gaps according to a New York Times article. The focus of these efforts is taxing services. The big test states are Michigan and Pennsylvania, with governors of both states pushing service tax measures. Where voters stand may be reflected in a June ballot measure in Maine.
Will an effort to tax services in California be far behind?
Recall that the Commission on the 21st Century Economy, often referred to as the Parsky Commission after its chairman Gerald Parsky, toyed with the idea of a tax on services before settling on a Business Net Receipts Tax as the major reform of the state tax structure.
Like the top-heavy, grand 17th Century Swedish Warship, Vasa, the commission’s proposal sank as soon as it was launched. However, individual members of the commission, along with others seeking more revenue for California treasuries, insist that service taxes must be employed to help balance the budget. The idea that California is now a service-oriented economy is echoed by the proponents of service taxes in other states.
While a few services are taxed in a number of states, the proposals in Michigan and Pennsylvania would include taxes on many services while lowering the current sales tax rate. Widening the tax base while lowering the rate is praised as both a way to flatten out the swings in revenue collection as well as a way to sell the tax change to taxpayers by emphasizing the lower tax rate.
The sales pitch usually falls flat with taxpayers. Voters understand that, in the end, governments end up with more revenue that comes from taxpayers’ pockets. Resistance to these tax reforms is high. Efforts to raise taxes on services were tried and reversed previously in Maryland and Florida, and once before in Michigan, which is trying again.
Services threatened with taxation vary from state to state. Some examples: In Kentucky, a proposal to tax golf green fees and hot air balloon rides; in Nebraska, farm equipment repair and shoe shines; in Pennsylvania, accounting and advertising.
Small business often leads the opposition to taxes on service. Adding taxes on the many services that small business need to function – say accounting or janitorial services – results in an increased burden on the shoulders of small business in this down economy. Passing along the costs to customers can backfire in loss of sales.
Trying to adopt a service tax will not be easy in California given the result of recent statewide tax votes. It will be unpopular, as it appears to be in the states that are testing the service tax waters.
As the Times’ article points out both the Michigan and Pennsylvania governors are termed out and are making the pitch for taxes on services knowing they do not have to run for re-election, an indication that promoting such a tax change is not healthy for an ambitious politician.
The vote in Maine is actually a referendum to uphold a package of taxes on services passed by the legislature while reducing the income tax. Among the services to be taxed in Maine is entertainment provided by clowns, comedians and jugglers.
Which makes me wonder, can we tax the service of lawmaking?