Sales Tax on Services: What to Expect

When people ask me what I do for a living, I tell them I spend all my days trying to explain why it is a bad idea to raise taxes. People then say "I bet it's a full time job", which is correct of course. 

Provided your full time job is 40 hours a week. It takes far more than that to get the message out what a bad idea big government really is. 

It does not help that those advocating on higher taxes, or even reporting on them in media, often base their arguments on opinions and beliefs more than facts and economic analysis. Unfortunately, the aftermath of the November meeting with the Revenue Committee still echoes of non-factual statements.

The latest example is a piece by Joan Barron under the 307 Politics Blog over at the Casper Star Tribune. Her article in itself is not opinionated, but a balanced commentary on the sales-tax expansion. Unfortunately, it is based on false premises or non-existent analysis, built into the material that the Revenue Committee deliberated during its meeting. Explains Barron:
The Joint Interim Revenue committee members fulfilled their top interim assignment recently. They passed a bill to broaden the tax base by expanding the services subject to the state sales tax by repealing their exemptions. This includes repealing the sales tax exemption on groceries, which could be expected to be the touchy crux of the debate over the bill.
Groceries are not services. Groceries are goods. This may seem like a nit-picky point, but it is not. It is important to keep the concepts straight here. If we mistakenly focus on groceries, we miss the big impact that a sales tax on services will have. It is, namely, going to have a big impact on the Wyoming economy. I am going to examine the details of the expansion later in a later article, but if it is anywhere near what it was last year, you will be paying a sales tax on haircuts, plumbing jobs, landscaping, an Uber ride, a UPS or FedEx delivery, utilities, architectural services, oil rig service, auto repair... 

Again without having all the details of the bill, my understanding is that lawyers will be exempt this time, unlike last year's bill. I will leave it to everyone out there to figure out why this exemption was thrown in there. 

To get an idea of the impact of a services-tax extension, keep in mind that two thirds of consumer spending is on services. Two out of three dollars we spend, on average, buy services. An apartment lease is a service; your electricity bill is for a service; your auto insurance is a service. It remains to be seen exactly what services will be covered by the tax, and how the tax is going to be counted. However, until the Revenue Committee or the Economic Analysis Division release any kind of estimate of the impact of the services sales tax, it is a good default assumption that for every dollar in spending that you pay sales taxes on today, you will be paying it on $3 if this bill passes. 

Again, it is now up to the Revenue Committee and the EAD to present different numbers. 

As for the sales tax on groceries, again we have no numbers from those who want it. Therefore, collect all your groceries receipts over one month, add it up and then add your state and local sales tax to that. This should give you a reasonable idea of how the groceries sales tax will impact your bottom line.

Speaking of the state and local sales tax, here is what Joan Barron says about it:
The sweetener in the bill is a half-cent reduction in the state sales tax to 3.5 percent. This would make the bill revenue-neutral, as the legislator leaders who assigned the study suggested.
No, no and no. First of all, as I explained the other day, the very idea of "revenue neutrality" is murky at best. The economic theory that goes into this concept is not nearly as straightforward as the Revenue Committee made it sound during their meeting. For one, are they talking about annual revenue neutrality, or neutrality over a business cycle? In other words, do they want static neutrality or dynamic neutrality?

Secondly - and I assume that this one falls back on the Economic Analysis Division - what calculations have they done to reach the conclusion that a 3.5-percent sales tax across the board is the right rate for whatever kind of revenue neutrality they are pursuing? I have studied tax reforms for more than 25 years, and I know of no reform anywhere, American or other, that has been revenue neutral. However, if the EAD or the economists on the Revenue Committee have better information, I will be happy to share it on this blog. 

I might also add that the idea is revenue neutrality for government, not cost neutrality for the taxpayer.

Speaking of which, there is a third point to be made. This is, again, one that I made in my article on the flawed economics behind this bill. When the state extends its sales tax to services, it marginally lowers its own rate to compensate for the expansion of the tax base. The idea, again, is some form of revenue neutrality. However, with the expansion of the state sales-tax base comes an expansion of the local sales-tax base. If we assume, again, that this will triple the cost of the sales tax to a regular household, and we assume that the sum total of state and local sales taxes today is six percent, then:

Before the expansion, you pay six percent on $100 of your spending;
The state now triples the tax base for the sales tax;
At the current state sales-tax rate, this means that you pay six percent in tax on $300;
After the cut in the state sales tax from 4 percent to 3.5 percent, you now pay a total of 5.5 percent in sales tax on $300.

In short, your cost for the sales tax - under these somewhat stylized but basically realistic assumptions - is not at all neutral. You will be paying 2.75 times as much in sales taxes after the expansion, as you did before it. 

Again, this is an experiment to explain what the expansion of the sales tax into services actually means. It is the best we can do because the Revenue Committee has not presented any analysis of the tax expansion to help taxpayers understand what is coming their way.  

As for the legislative treatment of this sales-tax expansion, it remains to be seen exactly how it turns out. As Joan Barron reports, 
Rep. Cathy Connolly of Laramie said she couldn’t vote for the bill because it would be hard for her to explain to her constituents that she supported removing the tax exemption on food. “I don’t think we’ve done enough homework on the exemptions,” Connolly said. Her amendment to pull groceries out of the repealer failed.
I applaud her for trying. However, those who want to see a broader, costlier sales tax will try very hard to get it through this year. According to Barron, outgoing Revenue Committee House Chairman Mike Madden explained:
last week in an interview he thinks the reform bill might pass the Legislature next year because, unlike previous proposals, it is constructed to be revenue-neutral. He also said he was glad to see that groceries are still on the repeal list so the measure will start out as a pure bill.
Expect this argument to be echoed by others during the session.

There is a lot more to be said about this issue.

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