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Modernizing the Sales Tax

Posted by Andy Nicholas at Jan 15, 2010 12:00 PM |
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Washington State’s sales tax hasn’t kept pace with changes in the economy over the last 75 years. As consumers spend a greater portion of their income on non-taxed services, like spa massages and hair replacement, instead of taxed goods, the state’s sales tax has become less and less adequate to meet the state’s needs.

One potential response to the effects of the economic crisis (detailed in our new policy brief) is to modernize our state sales tax to include currently untaxed consumer services such as hair and nail salons, admissions to movie theaters and sporting events, and travel arrangement services. Extending the sales tax to include services is sound tax policy.  Doing so would generate a sizable amount of resources (about $120 million) that could be used to prevent economically damaging budget cuts this year.  And in the long run, extending the sales tax to consumer services would make it a more adequate and equitable instrument for financing public services.

Bringing the sales tax in-line with the modern economy

The economy and consumer preferences have changed dramatically since Washington's sales tax was enacted in 1935. The graph below shows that consumers now spend a greater portion of their incomes on services than on goods -- a reversal from previous decades.

 


figure3
 

Without extending the sales tax to include currently untaxed services, the tax is likely become an increasingly less adequate source for financing state services.

Improving equity

Extending the sales tax to include consumer services would also reduce fundamental inequities in Washington’s tax system. Under current law, an individual who prefers to spend his or her money on goods, such as electronic massaging devices, is likely to pay more in sales tax than a person who prefers to purchase services, such as a massage from a therapist.  Extending the sales tax to consumer services would ensure that the sales tax treats consumers and businesses equitably, irrespective of their personal preferences or the types of products or services they provide


Click here to read the entire report.

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