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Business Costs & Regulation

States Eye More Taxes on Services

Fighting red ink, states may widen their tax bases by targeting items from laundry to roofing.

Years of tough budget crunching will force many states to start taxing more services, from laundry to plumbing to lawn care. State lawmakers and governors are almost universally loath to raise taxes, and the debate about expanding the sales tax base to cover industrial and consumer services is sure to stir controversy. But the slow economic recovery -- complete with depressed tax revenues, rising social program costs, pressing infrastructure needs and state balanced-budget requirements -- is forcing the issue out of the shadows.

States raise a total of $220 billion to $240 billion a year from collection of sales taxes. If all services were taxed at the same rate as manufactured product sales -- typically 4%-6% -- states would roughly double their total sales tax take, according to state budget officers and economists. Such a large expansion of the tax base is clearly out of the question and would be a death kiss for politicians. The public outrage would be overwhelming, and business advocates and lobbyists are quick to warn that taxing a slew of services would slow economic growth and dampen consumer purchasing.

Most states plan to move gradually and cautiously, but incremental steps toward taxing selected services look certain. Pennsylvania, for instance, will likely add levies on plumbing, dry cleaning, commercial window washing, shoe repair and helicopter fares.

Michigan, which is in one of the worst conditions, budgetwise, of all the states, is looking to tax more than 100 services, including accounting, garbage collection, bowling and landscaping, while possibly softening the overall sales tax rate from 6% to 5.5%. Kentucky is eyeing limousine services.

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Massachusetts may tax roof repair. Colorado and New Jersey may add taxes to professional interior decorating work.

All states already tax some -- but not many – services. Typically taxed are telephone services and utilities. A majority tax tickets to amusement parks. The National Association of State Budget Officers estimates that a typical state raises about 3% of its sales tax revenue from limited taxation of services. Figure on this rising to 7%-8% in the next decade as more services find themselves in the crosshairs of state revenue departments.