States Look To Tax Services To Balance Budgets

With so many states in dire fiscal straits, it's little wonder that so many of them are turning to looking at raising or imposing taxes on services rather than cutting spending to bring expenditures in line with revenues. Services are typically exempt from sales and use tax, but many states are looking to tax services as a way to increase revenues.

Never mind that we're in a recession and that revenues across the board are down; raising taxes at this point will not result in the anticipated revenues.

But this is also a period of economic gloom for states. Pension funds are in the red, federal stimulus help will soon vanish, and revenues from traditional sources like income and property taxes are slumping ever lower, with few elected officials willing to risk voter wrath by raising them.

“This is born out of necessity,” said Gov. Edward G. Rendell of Pennsylvania, a Democrat. His proposed budget, being debated in Harrisburg, would tax services including accounting, advertising and data processing.

Mr. Rendell argues that the state’s current sales tax system makes no sense. (Why, he asks, is the popcorn in his state’s movie theaters taxed, but the candy is not?)

“Look, I’m not a crazy tax guy,” Mr. Rendell said, reflecting on recent trims to the budget. “I know what we’ve cut the last two years, and I know how deep and painful the cuts have been. So I know that in the future there’s going to have to be a revenue increase, and this is the best of the alternatives, obviously none of which we’re happy about.”

Michigan’s revenues, adjusted for inflation, have sunk to a level last seen in the 1960s. And that may be exactly what at long last pushes through wide acceptance for taxes on more services, according to supporters of the idea, who say it makes sense in an economy that has long been service-based. In the past, such taxes have never quite been able to survive the political tussle.

A handful of states, including Delaware, Hawaii, New Mexico, South Dakota and Washington, already tax all sorts of services. Most states tax at least some services, particularly items like utilities.

Nevertheless, few states have gone where political leaders in Michigan and Pennsylvania are now suggesting: adding scores of services to their states’ sales tax requirement and lowering the tax rate under a widened tax base.

But from coast to coast, desperate governments are looking to tap into new revenue streams.

In Nebraska, a lawmaker has introduced a bill to tax armored car services, farm equipment repairs, shoe shines, taxidermy, reflexology and scooter repairs. In Kentucky, Jim Wayne, a state representative, and some fellow Democrats are proposing taxing high-end services: golf greens fees, limousine and hot-air-balloon rides, and private landscaping.

The justifications are endless - that the sales and use tax systems are a hodgepodge of exempt and taxable services that make little sense, that states need the tax revenues, and that these taxable services wont affect that many taxpayers.

What Gov. Rendell ignores is that when the recession ebbs and states finally start seeing economic growth, revenues will grow organically and without the need to impose further taxes.

It isn't necessary to keep raising taxes to bring in revenues that don't match expectations - a situation we've seen repeated around the country when taxes are imposed to fund certain programs and they simply don't materialize, leaving the programs and the overall budgets in deficit.

Holding the line on spending, particularly in recessions is what individuals and businesses do, and then begin to spend more when their economic situations improve. States must do the same. They cannot expect taxpayers to shoulder an ever increasing burden when they simply don't have the money to spend.