Store Research
Raising States’ Revenue: Is Expanding Sales Tax to Services the Answer?
March 4, 2010
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Given the current fiscal climate around the country, states are looking for new sources of revenue. At least two states, Pennsylvania and Michigan, have introduced legislation to tax services in additional to tangible goods. Services can include everything from a haircut to a funeral.
If we look at Michigan, currently they have series of House bills and a Joint Resolution that would enact just such a tax. The proposal would reduce overall sales tax by one percent, but extend the tax to services in addition to tangible property. There would be exceptions to the service tax including services to businesses, educational services, services to nonprofits, and physician services.
Michigan has previously enacted legislation that would have added a sales tax on services in Public Act 145 of 2007, but the Senate quickly passed a bill that retroactively removed the validity of the Public Act.
The current proposal in Michigan is backed by the Governor who laid out a similar plan in the 2010-2011 budget proposal. The proposed exemptions for certain kinds of services, especially business to business services, are an attempt to address some of the larger concerns and objections raised as a result of the prior failed enactment in 2007.
Those in support of the bill include the Michigan League for Human Services, an advocacy group for the poor. Their argument in favor of sales tax on services is simple: revenue is down, and spending has shifted from tangible goods to services which now dominates 60% of the market in Michigan. Therefore, a tax on services is a logical way to increase revenue. Additionally, they argue that sales tax on goods affects the poorest in Michigan in the greatest numbers, and taxing “luxuries” such as pet grooming would even the burden across the population.
In opposition, legislators like Michigan House Representative Bob Genetski worry that the bill will hinder job creation and increase suffering for small businesses and working families. Joining Representative Genetski are business interest groups such as the Small Business Association of Michigan who argue that growing the economy is the real solution to the budget shortfall.
As a comparison, several states already tax certain services, such as Maine who expanded sales tax to services like dry cleaning and car repair in 2009. The implications of expanding the sales tax base could be huge for businesses. Only time will show the true effects of these kinds of changes.