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Expand the Sales Tax

by Indy, published

Businesses large and small loathe it.

The nation's giggling about it, though everyone's missing a much better laugh line in South Dakota's proposed tax on rodeo clowns.

Republicans hate it because they're not about to loosen the fiscal chastity belt they've donned to preserve their fiscal purity.

But despite opposition from everyone from animal lovers to golfers, Gov. Arnold Schwarzenegger's proposal to expand the state's sales tax to cover a number of services is a sound idea.

Some would say the levy's long overdue.

"When properly done, expanding the tax base is simply good policy," the Institute on Taxation and Economic Policy said in a paper based on 2007 data. "Taxing services can make sales taxes less regressive, less discriminatory and more responsive."

Analysts have long said California was missing out on a lot of money by not subjecting services - accounting, landscaping and entertainment in addition to golf and vets - to the state's sales tax.

The state Board of Equalization's chairwoman estimated almost a year ago that taxing more services could raise $8 billion a year.

Going back even further, a 2005 report by the California Tax Reform Association identified an expanded services tax as one of the keys to the state's long-term financial stability. "Many 'services' are actually the temporary use of tangible commodities, such as admission to sporting events, ski resorts, golf courses, amusement parks, gyms and concerts, and should be in the tax base," the report said.

It's really nothing more than an accident that those things aren't taxed in California and many other states.

"When most state sales taxes were enacted in the 1930s, services were a relatively small part of consumer spending," the Institute on Taxation and Economic Policy said. "In recent years, however, spending on services has skyrocketed."

And nationwide, tax policy has not caught up to that shift. Goods fell from 39 percent of household consumption in 1970 to 33 percent in 2001, the Center on Budget and Policy Priorities said in a 2003 report. During that same period, consumption of services rose from 31 percent to 44 percent of purchases.

Yet, instead of expanding the tax base to include more services, states instead increased the general sales tax rate.


The result nationwide has been tax laws that are more regressive - that tend to hit lower-income residents harder because they take a bigger bite percentage-wise out of their incomes. "Exempting services discriminates against individuals who consume more goods than services," the institute said.

So how does that work?

Someone who goes to a frau-frau salon doesn't pay the tax. Someone who uses Lady Clairol at home does. Tax-preparation software, taxed; going to a tax preparer, not. A rented movie, taxed; a trip to the theater, not.

As the Center for Budget and Policy Priorities put it in another report, why tax the lawnmower but not the landscaping service?

The center does acknowledge in its 2003 report one of the historic knocks against expanding California's tax: Extending it to businesses not already collecting it would be an administrative nightmare.

Schwarzenegger has done what he can to address that concern, choosing to propose service taxes for businesses that already collect sales taxes on other items. Veterinarians already sell pet supplies, for example, so the change would be easy to administer.

That's led those businesses to howl. "You don't see a tax on movies," Bob Bouchier, executive director of the California Alliance for Golf, told The Associated Press. "You don't see a tax on bowling. You don't see skiing. You don't see a tax on any other sport."

Good point. Maybe in coming years officials could address the inequity.

But for now, staring down the barrel of a $40 billion deficit, speed is of the essence. The expansion might not be fair to certain segments of the economy, but it does a lot to smooth out unfairness in the tax structure as a hole.

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