Expand the Sales Tax

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.