“Broadening the sales tax base to encompass more services – as Maine did during this last legislative session – is a step forward that tax experts have long recommended,” said Kurt Wise of the Maine Center for Economic Policy. Opponents of the reform are seeking a ballot measure to repeal it. “Repealing the measure would move Maine in the wrong direction,” says Wise.
Other states looking to broaden their sales tax base include North Carolina, which is seriously considering such a step as part of an overhaul of its tax system. Official commissions in California and Colorado are discussing this approach as well. Arkansas, Nebraska, and New Jersey all opted to tax additional services earlier in the decade.
Maine’s reform measure (LD 1495) will help stabilize state revenues and limit the size of future budget shortfalls. The Office of Fiscal and Program Review estimates that projected revenues over the 2010-2011 biennium will fall some $1.4 billion (or 20 percent) below the amount needed to maintain services at their 2009 levels. Drastic budget shortfalls are affecting most other states as well, and reforms like Maine’s can help states address short-term budget gaps as well as longer-term revenue issues.
“When it comes to tax reform, times of crisis can also be times of opportunity,” notes Michael Mazerov, the author of the report and a senior fellow at the Center on Budget and Policy Priorities. “During the boom years of the 1990’s, states had little interest in updating their sales tax to reflect the shift toward a service-oriented economy. Now, several states are looking at taxing more services, and more may join them if states’ budget problems continue.”
Until Maine’s tax reform package takes effect next January, Maine will continue to tax just two of 40 household services that many other states tax, the Center’s report explains. When the reforms go into effect, Maine will begin taxing about two dozen of these services.
“The reforms we have enacted here in Maine will help to modernize our tax system,” says House Majority Leader, John Piotti. “What is important to remember about this tax reform package, however, is that broadening our sales tax base is more than offset by reductions in our income tax. As a result, almost 90 percent of Maine households will see their total tax burden decline.”
While the sales tax changes will increase state revenues by about $58 million annually, income taxes will be reduced by about $112 million. The difference will go toward lowering the overall tax burden for 87 percent of Maine households, according to Maine Revenue Services.
As the new report explains, for decades, spending by American households has been shifting steadily away from goods and toward services. Most state sales taxes, however, still rely heavily on the purchase of goods. As a result, tax collections will continually shrink as the economy shifts toward the purchase of services.
Currently, Maine taxes just 24 of the 168 potentially taxable services identified by the Federation of Tax Administrators. With tax reform (LD 1495) that figure will rise closer to 50, boosting the state’s sales tax revenues by 4 percent.
The report explores the mechanics of the sales tax and how best to structure newly broadened taxes on services. As Maine has done under LD 1495, the report shows that most states avoid taxing services that only businesses purchase, thereby limiting costs for businesses. On the other hand, including most consumer services means that everyone helps pay a portion of the tax. Taxing people who rent a DVD, but not those who go to the movie theatre, for example, is not an equitable approach.
Report Summary: Expanding Sales Taxation of Services: Options and Issues