(MCT) WASHINGTON — Pamela Hahn, a licensed cosmetologist for 44 years, says Michigan’s proposed tax on hair salon services could further hurt a recession-damaged industry and push more stylists to forego renewing their licenses and instead work off the books in their own homes. If there are fewer legitimate businesses paying into the state coffers, “how does that help?” she asks.
Secretary of the Michigan Cosmetologists Association in Lansing, Hahn says salons are closing down completely because people are cutting back, and many can’t afford to get their hair done. “There has to be a better way, what I don’t know, but what do we pay these government people for if they can’t figure it out?”
Hairdressers like Hahn are fighting the same fight that funeral home directors and other businesses are waging in Pennsylvania against sweeping proposals to add sales taxes to an array of services that most states currently don’t tax.
With tax revenues at a historic low and federal stimulus dollars drying up, states like Michigan and Pennsylvania are eying adding a sales tax to some of the 180 services that states could be taxing, ranging from pet grooming and dating services to dental and legal services. The change would be a fundamental shift in states’ tax systems, but the proposals are already running into stiff opposition from the business community.
“There is little rhyme or reason why we tax some items or services and wholly exempt others, except that in years past someone lobbied to secure favored treatment for themselves at the expense of others,” Pennsylvania Gov. Edward Rendell said when he unveiled a sweeping proposal that would reduce the basic sales tax from 6 percent to 4 percent, but would apply it to 74 goods and services currently exempted. The package from the term-limited former mayor of Philadelphia encompasses personal and business services, including funeral homes, advertising, accounting and plumbing services.
“If you do your own laundry, the laundry detergent is subject to the sales tax. But if you have your laundry done, it’s sales-tax free,” Rendell, a Democrat, said as he laid out a litany of current exemptions that he said “defy logic.”
States have long taxed goods, like cars and appliances, since the 1930s, bringing in nearly 35 percent of the general revenue for the 45 states that have a sales tax. (Alaska, Delaware, Montana, New Hampshire and Oregon don’t have one.)
But the shift in the U.S. economy from producing goods to services has meant fewer tax dollars flowing into states that have been slow to tap the service pool. Hawaii, New Mexico, South Dakota and Washington state tax more services than other states, according to the most recent data available, a 2007 survey from the Federation of Tax Administrators, a group representing state tax authorities.
Estimates of the revenue states could reap by expanding the sales tax to services vary widely, but it’s easily in the billions of dollars nationwide. New Jersey, for example, expanded its sales tax to roughly a dozen services in 2006 to include tattooing, tanning and private detective services, and has collected more than $400 million in new revenue each year, a 5 percent increase in sales tax receipts.
Some two-thirds of the country’s $13 billion economy is service-related, most of which states don’t tax, says Sujit CanagaRetna, a senior fiscal analyst at the Council of State Governments. He says taxing services “moves state tax systems into the 21st century” and away from the outdated system that states have used for the last 70 years.
California, Illinois, Massachusetts and Virginia probably could increase their sales tax revenue by more than a third if they broadly taxed services purchased by households, such as landscaping services, health club memberships and car washes, according to Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, a Washington, D.C., group that examined states’ options for expanding sales taxes on services in a 2009 report.
A handful of states, among them Arkansas, Connecticut, Ohio and Nebraska, did levy sales taxes on additional services as they began to recover from the 2001 recession, but the changes were largely incremental, not comprehensive like the plans in Michigan and Pennsylvania.
States back then took the slow approach because taxing services is politically explosive and a few well-publicized debacles have made others leery of trying. Florida, for example, passed a far-reaching tax on most personal and business services in 1987 only to repeal it the following year because of intense business opposition. Massachusetts approved a sales tax on certain services in the summer of 1990, and it was canned by the following spring. And more recently, Maryland in 2007 added what was dubbed the “tech tax,” which was rescinded before it took effect after the computer industry mounted an aggressive campaign against it.
