Services Targeted for Taxes: Lawmakers consider taxing services as consumers spend less on retail goods.

• Author: Brainerd, Jackson

The sales tax is not what it used to be.

Although it's still one of the most important and longest-standing sources of revenue for the 45 state governments that levy it, the tax has steadily lost ground for the last several decades as consumers increasingly spend more on services than on retail goods.

Services can be grouped in broad categories, such as professional (accounting, legal), personal (tanning, salons, barbers) and business (advertising, magazines). Many of these are exempt from sales taxes.

Most state legislatures adopted their sales taxes between 1930 and 1960 and chose to apply the tax to the sales of tangible personal property, which represented 60% or more of the average consumer's total personal expenditures during that time. Since then, however, the amounts consumers spend on tangible property and services have basically reversed. Services now make up about two-thirds of personal consumption.

This narrowing of state sales tax bases has resulted in dwindling revenue. To compensate, lawmakers have gradually raised sales tax rates, which averaged 3.25% in 1970, 5% from 1990 through 2000, and 6% today.

Tax policy experts on both ends of the political spectrum generally agree that good tax policy follows the widely accepted principle of "broad bases, lower rates" and should fall to a greater degree on the things people buy the most.

The number of services taxed by each state varies fairly widely, according to a recently updated survey by the Federation of Tax Administrators. Only six states--Delaware, Hawaii, New Mexico, South Dakota, Washington and West Virginia--tax services broadly and few have expanded their tax bases. Perhaps most notable in the updated survey was how little things had changed from when it was last conducted, in 2007. Iowa and Kentucky both expanded their tax bases in 2018 to include a handful of services (tanning, landscaping, subscription services), and Connecticut added dry cleaning and interior design work in 2019. (Connecticut has added 20 services over the last decade, the most in the country.)

A significant majority of states, however, added fewer than 10, if any. But that may be changing.

In a December special session, Utah lawmakers passed an extensive tax reform package. Along with lowering income taxes, restoring the full grocery tax and repealing exemptions on motor fuel taxes, the legislation also eliminates certain sales tax exemptions (college sporting events, newspaper subscriptions...