States should be able to tax services, not just stuff

Arizona voters could choose to become only the second state to exclude services from sales taxes. One of the basic principles of taxation is to have a low rate and a broad base.

[P]olicy experts warn that such a ban limits a state’s revenue-raising options and could actually be a greater burden on the poor. Across the country, states have struggled to keep up the same revenue growth as they experienced before the recession. One big reason is that consumers are spending far more on services — most of which aren’t taxed — than goods, which are. Without the ability to expand the sales tax base, lawmakers looking to stabilize their slowly shrinking revenue would only be left with the option to raise the sales tax rate.

“That does not portend well for the future of the sales tax as a state revenue instrument,” says Scott Drenkard, the conservative-leaning Tax Foundation’s director of state projects. “It prevents Arizona from having a sufficiently broad sales tax base and is harmful to the long-term productivity of the tax.”

North Carolina has gone in the other direction, including more services. Unfortunately, the Department of Revenue has taken it upon itself to also tax goods sold by out-of-state companies.

Joseph Coletti / Senior Fellow

Joe Coletti is a senior fellow at the John Locke Foundation focused on fiscal policy issues. He previously headed the North Carolina Government Efficiency and Reform initiativ...

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