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Taxing Services?

Yesterday, the The Salt Lake Tribune editorial board called for imposing sales taxes on services. The Tribune wrote "Ours is increasingly a service economy. The tax system should reflect that. "

The proposal probably won't get very far, but here are some points to consider.

1. Despite the increasing size of the service economy, the sales tax base is closely tracking inflation and population growth. In 1996, taxable sales in Utah were $25.844 billion. In 2006, taxable sales had increased to $44.795 billion, an annualized increase of 5.7%. This is slightly higher than annualized combined inflation and population growth of 5.1% from 1996 to 2006.

If the 3-percentage point reduction in the state sales tax rate on food had been in place in 2006, the annualized growth rate in Utah's effective sales tax base would have been around 5.0%, just barely lower than combined inflation and population growth.

2. Most economists argue against imposing sales taxes on business-to-business services. Taxing business inputs leads to tax pyramiding which hides the true cost of government because businesses pass these taxes on to consumers in the form of higher prices, to shareholders in the form of lower dividends and stock prices, and to employees in the form of reduced compensation.

Some liberal economists argue that taxes on business inputs are a regressive tax since, they argue, these taxes are passed on to consumers in the form of higher prices.

Moreover, taxing business-to-business services such as accounting, IT, legal, and advertising places smaller businesses at a disadvantage to larger businesses because larger businesses perform a lot of this work in-house which means it would not be subject to sales taxes.

3. According to the Council on State Taxation (COST), the lion's share of household services (66%) is medical. Most elected officials would be reluctant to impose sales taxes on medical services.

4. Utah already taxes a lot of services including automobile repair (11% of total household service purchases according to COST), amusement and recreation services such as movies, athletic events, concerts (6% of total household service purchases according to COST).

Utah imposes sales taxes on most repairs of personal property, including household appliances such as washing machines, dryers, refrigerators, as well as computers, copying machines, and automobiles. Repairs of items that are attached to real property such as hot water heaters, furnaces, HVAC, dishwashers, and built-in microwaves are not subject to sales taxes.