ECONOMIC ASPECTS OF TAXING SERVICES

Abstract

At least seven states have acted within the past three years to selectively tax individual services under the sales tax, and at least ten states have given serious consideration to major base reform. The revenue potential of service taxation varies considerably across states, but in every state is dominated by construction and business services; the taxation of personal services offers limited opportunity for increasing revenues. Service taxation may enhance the adequacy of sales tax revenues, and may discourage development of certain industries; however, the latter effects may be no greater than generating the same revenues by raising the tax rate. Sales taxation of services is generally regressive for incomes less than $30,000 and proportional above. Administrative and compliance aspects indicate that rate increases may be less costly than base expansion.