Study Examines Potential Tax Tweak Impact
A new report from the Indiana Fiscal Policy Institute suggests expanding sales tax to include services as well as goods could bring an additional $5 billion to the state per year. In its study, the institute says the retail sales tax base “has been disappearing.” The change would involve services ranging anywhere from consumer, personal care and household maintenance professionals to financial, insurance and even health care and education costs.
Indiana Fiscal Policy Institute President John Ketzenberger says Indiana University Chancellor's Professor of Public and Environmental Affairs John Mikesell was brought in to conduct the research because the concept of broadening the sales tax base was suggested often at a statewide tax summit last year.
Ketzenberger emphasizes the institute's purpose is to respond and inform the public and legislature about current issues and not to suggest what lawmakers should or shouldn't do.
He says proposals in other states attempting to expand taxing in this way have not had a good track record.
You can connect to the full report by clicking here.
Source: Inside INdiana Business
March 19, 2015
INDIANAPOLIS, Ind. (March 18, 2015) – The Indiana Fiscal Policy Institute (IFPI) today released its report “Considering Sales Taxation of Services in Indiana.” Since 1963, the state of Indiana has primarily taxed the purchase of goods. Under Indiana law, any extension of coverage beyond the purchase of goods, particularly the taxation of services, would require specific identification of those transactions or would require a fundamental revision to how Indiana's tax base is measured.
The new report takes a comprehensive look at the probable consequences of extending the Indiana retail sales tax to include consumer purchases of services. The analysis finds that expanding sales tax to include the purchase of all services would increase Indiana's tax base by more than 85 percent, bringing up to $5 billion in state revenue.
Specifically, the report finds that taxing services for motor vehicles, recreation, consumer professionals, personal care and household maintenance would increase Indiana's tax base by more than 20 percent. Adding financial services and insurance (with the exception of life insurance) would provide more than 15 percent in new revenue. Furthermore, adding health care and education would increase tax revenue by 50 percent.
The analysis emphasizes the importance of including all reasonable transactions in the tax base so that the tax rate can be kept as low as possible while still providing budgeted revenue.
“There's clearly enormous financial incentive for the state to expand Indiana's sales tax base to include the purchase of services,” said John Ketzenberger, president of the IFPI. “A more broad tax base could create a lower overall sales tax rate which would lessen the burden on individuals, while still generating revenue for the State. There are many pros and cons to consider, but one overarching principle – how you spend it matters. The key is finding the right balance.”
According to the report, Indiana's state retail sales tax yielded more than $6.8 billion in fiscal year 2013, roughly 40 percent of total Indiana state tax revenue; over a third more than yielded by the second most productive tax (the individual income tax); and more revenue than from any source outside of federal aid. Throughout the years, Indiana has substantially shifted toward heavy reliance on the sales tax for support of state services, making it the foundation for the state revenue system.
A number of states successfully apply their sales tax to services either generally or selectively, and the selection of services taxed in some states is extensive. Currently, four states in the U.S. (Hawaii, New Mexico, South Dakota and West Virginia) tax all services unless the service is specifically identified as exempt. Forty-one other states, including Indiana, tax a service only if the sales tax statute specifically identifies it as being taxed.
Compared to the other 41 states, the report identifies Indiana's coverage as narrow. Indiana currently taxes utilities and television provided to residential customers, services associated with rental of tangible personal property, landscaping and water softening. According to the report, other states with selective service coverage are much more aggressive in including purchases by households in their tax base.
Despite its success, the report finds that Indiana's retail sales tax base has been disappearing. In 1970, the sales tax base amounted to nearly 55 percent of state personal income. By 2013, it was somewhat below 40 percent. According to the report, Indiana's sales tax base is now only around 70 percent as large a component of the state economy as it was in 1970. The decline, according to the report, has been driven by changing patterns in spending behavior by households.
“In recent decades, household consumption expenditure has shifted away from taxed goods and towards untaxed services,” said Ketzenberger. “This is the outcome of changing household behavior over the years. The untaxed service share has increased while the goods share has fallen, playing a major role in the state’s dwindling sales tax base.”
In 1970, Indiana's two percent sales tax rate was the lowest out of all 50 states. By 2014, its seven percent rate had become the second highest in the nation.
“A natural consequence of the size of Indiana's excluded service tax base is an inevitable increase in the existing sales tax,” said Ketzenberger.
Expanding Indiana's sales tax to include consumer purchases of services does come with some areas of concern, however. According to the report, an extension of the tax could be accomplished by either redefining the structure of the tax to include sales of tangible personal property and services, or by selectively adding identified services to the short list already taxed. Neither approach is without problems, as the report illustrates from a review of Florida, Michigan and Massachusetts.
The experiences of other states throughout the U.S. also demonstrate problems associated with trying to include services predominantly purchased by businesses in the expanded base. Not only is that expansion bad economic policy, the report notes, it has the potential for creating severe administrative problems as well. In addition, small businesses may have compliance problems with an expanded sales tax.
“If state lawmakers were to consider this concept it is critical to make the expanded tax as simple to comply with as possible for all businesses, especially small companies,” said Ketzenberger.
The full report can be found on the Indiana Fiscal Policy Institute website – www.indianafiscal.org.
ABOUT THE INDIANA FISCAL POLICY INSTITUTE
The Indiana Fiscal Policy Institute (IFPI), formed in 1987, is a private, non-profit governmental research organization. The IFPI’s mission is to enhance the effectiveness and accountability of state and local government through the education of public sector, business and labor leaders on significant fiscal policy questions, and the consequences of state and local decisions. The IFPI makes a significant contribution to the important, on-going debate over the appropriate role of government. The IFPI does not lobby, support or oppose candidates for public office. Instead it relies on objective research evidence as the basis for assessing sound state fiscal policy. Contributions to the IFPI are fully tax deductible under section 501(c) 3 of the Internal Revenue Code.
Source: The Indiana Fiscal Policy Institute