Monday, June 28, 2010

Why You Should Care About Taxing Services

Since I'm from California, I have the unique delight of watching my liberal dreams (e.g. adequate university subsidies and well-funded public transportation) dashed by the distressing budgets that come out of Sacramento. I've talked about this before, particularly the Golden State's egregious 2/3 vote requirement to raise a tax. But I'm not here to talk to you about that.

I'm here to tell you why you should care about an esoteric tax reform effort: applying the sales tax to services. According to the Center on Budget and Policy Priorities:

"Most states could improve their sales taxes and their tax systems in general with some expansion of the tax base to include services. Levying sales taxes on services makes state tax systems fairer, more stable, more economically neutral, and easier to administer. Moreover, because state sales taxes are a major source of funding for schools, universities, health care, public safety, and other functions of state and local government, adding services to state sales tax bases can help states maintain their support for those functions, for instance during an economic downturn when state revenues are declining."

Think about where things stand now. Local governments are addicted to sales tax revenue from big-ticket physical items. One of the biggest-ticket items of all is the automobile. There it is, the same local governments that have so much control over our land use regulations and transportation policy, who have the power to usher us into walkable neighborhoods or entomb us in vehicles, are dependent on cars for revenue.

We should tax services. We could do it in a revenue-neutral way (i.e. expand the tax base and lower existing tax rates). Our economy is based on services anyway, it would reduce perverse incentives on local governments, and it would stabilize state finances somewhat to pay for critical services like transit.


  1. If you want to diminish perverse incentives, bring back the property tax. Property taxes are something around 1% of assessed value under Prop 13- this is why our sales taxes are among the highest in the nation. If property taxes made up a larger percentage of local government revenue, there would be a huge incentive for local governments to encourage density in their jurisdictions. Also, property taxes have another great property- they're stable as hell. Unlike sales taxes, which bounce around with the business cycle, property taxes stay roughly the same in good times and bad.

    It would be politically unpopular to raise taxes on California homeowners, so I say we should go to split-roll property taxes: residential property remains under Prop 13 (for now), while commercial property ends up under a regime like every other state in the nation. This would bring in immediate revenue- some institutional landholders (like the tiny companies Union Pacific and Burlington Northern-Santa Fe) have been paying 1% of their property's 1978 value since 1978.

    Of course, taxing services would also be a good thing. I know I spend more on services than I do on tangible goods- Netflix streaming movies over DVDs, for example.

  2. In most industrialized nations, property taxes are much higher on vacation houses and on investment property than on homes. This means that localities get more tax revenue and people don't have to worry about losing their housing because of property taxes.

  3. In California, it doesn't matter what your property is, nor what you do with it- property taxes are capped at a ridiculously low 1% of assessed value, and re-assessment is only permitted upon sale of the property, under Proposition 13.