D. Dowd Muska

 

This Week's Column

   

 

Broaden (and Cut) the Sales Tax

July 23, 2015

In North Carolina, veterinarians are miffed. In Connecticut, it’s car-wash proprietors.

State and local governments reflexively pursue more revenue, rather than budget cuts, as the preferred method to balance their books, and the sales tax remains a favorite tool. Legislators in the Tar Heel State are considering an extension to several types of services, including pet care. Pushback is fierce. “Human healthcare is not taxed,” charged Karen Miller, owner of the Lincolnton Animal Hospital. “Veterinary care is medically necessary for its patients just as human healthcare is for people. Veterinary care should not be discriminated against.”

To the north, Nutmeggers who need to clean their vehicles are facing a tax blast from the past. Car washes were subject to Connecticut’s sales tax between 1989 and 1993. But the levy, currently set at 6.35 percent, is back. It’s posing a challenge for coin-operated facilities, where equipment is usually designed to accept quarters. “You put everything you own on the line to run a business,” thundered Todd Whitehouse, a former president of the Connecticut Car Wash Association. “And for someone to come in and say, ‘We’re going to tax you on something you can’t collect, just raise your price,’ is not the answer. We’re a discretionary purchase. People need gas in their vehicle to get to work, but they don’t need a clean car to get to work.”

It’s natural to sympathize with the plight of industries freshly targeted for “revenue enhancement.” But the squabbles in North Carolina and Connecticut illustrate that a sales tax’s base is as important as its rate. And judged by the principle of fairness, sales-tax bases fail in spectacular fashion.

Just a handful of states tax groceries. Almost all overlook prescription drugs. Apparel enjoys preferential treatment in several states. “Economic development” justifies sales-tax breaks for everything from farms to manufacturers of directed-energy weapons.

And services? They regularly escape taxation, an odd anomaly noted by Joe Cahill of Crain’s Chicago Business: “Buy a bookcase … and you’ll pay sales tax on the purchase. Hire a carpenter to build a bookcase for you, and you’ll pay no sales tax. Buy a lawn mower, pay sales tax. Pay a landscaper to mow your lawn, pay none. Buy nail polish, pay tax. Get a manicure, pay none.”

The sales tax is said to be a levy on consumption, but in reality, it applies to only some kinds of consumption. That’s why the levy should be broadened.

Huh? Widen the sales tax?

Yes, and here’s why. Americans purchase very different things than they did during our grandparents’ era. In the late 1940s, consumer expenditures were dominated by stuff. Nearly 73 percent of earnings bought food, clothes, furniture, books, toys, and appliances. By 2012, a dramatic shift had transpired. Services accounted for over 60 percent of out-of-pocket spending.

The switch is simple to understand, if you think about it. At mid-century, homes were smaller. Travel wasn’t as common. Entertainment options were limited. Few middle-income individuals and families hired housecleaners, much less SAT tutors, dog-walkers, computer technicians, home remodelers, wedding planners, gardeners, and eldercare aides. Washington’s free-trade policies, which drove down the price of many goods, was another factor.

The move to (mostly) untaxable services from (mostly) taxable goods partially explains why sales-tax rates are always rising -- they’re attempting to grab a bigger share of a shrinking pie. In a 2013 analysis, California’s Legislative Analyst’s Office found that had “spending on taxable items kept pace with the state’s economy since 1980, the sales tax would generate the same amount of revenue for state and local governments as it does today at a much lower rate -- 5.2 percent instead of the current rate, 8.4 percent.”

In 1950, economist John F. Due wrote that sales taxes, once scorned as “medieval anachronisms,” were “drawn up hastily, with little thought to their exact aims beyond raising money, their economic effects, or the best structures in terms of the desired purposes.” That’s a fine description of where we are today.

Sales-tax modernization is woefully overdue. Transitioning to a true consumption levy (i.e., treat all sales to consumers equally) would reduce complexity and destroy the sleazy way in which industries secure a common form of corporate welfare. It would also expand the number of voters -- customers and entrepreneurs alike -- motivated to keep rates low.

Sorry, vets and car washes. Your services shouldn’t get special status.

Broaden the base, and cut the rate. A sound approach to all forms of taxation, and particularly applicable to the sales tax.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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