Sales Tax

OREGON GAMING MEASURE DROPPED: Backers of an initiative to establish Oregon's first non-tribal private casino say they've decided not to go forward. They could revive the proposals, but want to see how proposals for two tribal casinos fare first.

IMMIGRATION COPS: The Arizona legislator who wants to allow police officers to enforce immigration laws is pursuing dual tracks -- a ballot initiative and legislation at the same time. The initiative is back-up, he explains.

COLORADO GOV RAIN ON SPEAKER's INITIATIVE: Gov. Bill RItter, a Democrat, questions the political strategy behind an effort by the Democratic House speaker in his state to qualify a measure lifting some of the state's spending limits. Ritter has been trying to reduce the number of measures on the November ballot.

ONE CENT SALES TAX TO FUND TRANSPORTATION: Arizonans, including Gov. Janet Napolitano, have launched an initiative to pay for $42 billion in transporation spending with a one-cent sales tax. The full plan for how they would spend the money is due next month.

In the past year, we have seen both Michigan and Maryland enact new taxes, only to repeal them soon thereafter and before they became effective, due to complaints. That's a lot of work for no effect. What could have been done differently?

On 12/1/07, the day a use tax on specified services was to go into effect, Michigan repealed the law (see prior blog post). More recently, Maryland repealed its expansion of the sales tax to computer services. In November 2007, the legislature added computer services to a measure designed to address a budget shortfall (see Washington Post article of 12/9/07). The tax was to become effective on July 1, 2008. Fierce opposition by the business community led to its repeal in April 2008. The tax would have mostly applied to businesses since they purchase more computer services than do individual consumers.

Back in 1987, we saw Florida expand its sales tax to include specified services, only to repeal that tax 6 months later. In 1990, Massachusetts expanded its sales tax to services, but repealed it before the effective date.

Tax systems can get out of date. For example, an income tax designed with a rate structure to apply to specified income levels (some type of progressivity goal), will become out of date if the tax brackets are not adjusted for inflation. That is, if individuals with income between $30,000 and $40,000 are to have a 15% rate, they will start to creep into the next higher rate as their income increases with inflation (for example, a person gets a cost-of-living raise), even though their buying power has remained constant (they are really no richer). So, one way to keep the system current, is make an inflation adjustion to the income levels at which each tax rate bracket begins.

What about keeping a tax base current and relevant? That is, enabling a tax base to reflect current ways of doing business and how people live even as things change. That's harder than the rate adjustment which can just be built into the law by having a rule that tells the IRS to adjust the rate structure annually for inflation. Keeping a tax base current and relevant requires regular attention from legislators and making tough decisions. For example, perhaps decades ago it made sense to provide special tax breaks to a particular industry. Yet, if such breaks are not looked at regularly, they remain even when no longer needed. And, it is politically difficult to get a tax break removed once it has been there for a while.

Recently, to address budget problems, Michigan lawmakers agreed to expand the sales tax base to include many more types of services (see prior post). Big surprise - taxpayers and service providers did not like the change - a $725 million tax increase (see story in The Detroit News, 11/1/07)

On 12/1/07, the effective date of the expanded tax, Governor Granholm signed HB 5408 (PA 145) to repeal the tax on services. That expected sales tax revenue will be replaced with a business tax surcharge.

There are many good reasons for having a sales tax cover all types of personal consumption rather than just tangible personal property (see prior post). However, change is difficult. Expanding the sales tax base to include more types of services means that businesses, such as nail salons and child care facilities, who have not collected sales tax before and not had to file returns, now have to.

How might the Michigan sales tax expansion to services have been done in a way that might have reduced the desire to immediately repeal it?