Baby Sitter Tax? Legislature May Tax Services
Updated May 15, 2009
Are baby sitters going to start charging sales tax?
According to Senate Finance Committee Co-chair David Hoyle, legislators may extend the sales tax to cover services as part of a tax increase package. Hoyle said the Senate may consider tax reform that would include taxing some services for the first time.
In the past, some have suggested taxing automobile repairs and legal services while lowering the percentage rates for sales taxes and individual and corporate income taxes, but former efforts to impose a tax on services have been unsuccessful. Now the state is facing an estimated $3 billion+ shortfall, and a state panel continues to drum that North Carolina's tax system is outdated and doesn't tap into the growing service fields.
The idea of taxing services has floated through the dreams of policymakers and government advocates for years, and they’re getting help from some major players in North Carolina’s business community. NCSU’s Emerging Issues Institute, headed by former Governor Hunt, has been a typical proponent, advocating for a tax overhaul that imposes sales taxes on services. Former Republican Governor candidate Richard Vinroot helped the Institute push support for the plan, but he believes it should be revenue-neutral.
But that's not how the administration sees it, looking to services as an untapped cash cow.
How can we fix our problems?
In 2006, Business NC wrote, “The sales tax in North Carolina, as in many states, rests on the sale of goods. Services have not been taxed in most states, yet in the United States we’re moving to a service economy. So sales tax rests on a continuously shrinking piece of the economic base.”
It’s true that North Carolina’s economy is shifting shifted from a manufacturing and agricultural base in the last two centuries to a service-based economy today. But while the state has resisted extending the sales tax on services, it has increased other taxes disproportionately, making the state’s effective tax base unattractive for most business development.
Z. Smith Reynolds Foundation Connection
In 2002, then-Governor Mike Easley appointed Z. Smith Reynolds Foundation executive director Thomas Ross to chair the Commission To Modernize State Finances. Other members included Senate Finance co-chair David Hoyle. While offering no specifics, that commission reported that including services in the sales tax base would nearly double it, either giving politicians a dramatic windfall or offering taxpayers dramatically lower rates.
Hooker Tax?
Texas is a good example of how a sales tax on services might work. Their tax is broad – covering everything from auto repair and grass cutting to phones and email, insurance, golf course admission and home repair. Even those euphemistically named escort services get taxed, expanding the definition of sin taxes.
However, in a wrong worthy of a discrimination lawsuit, professional services like lawyers are exempt while the women in the world’s oldest profession are subject to tax.
But with no individual income tax, Texas’ taxes are lower, ranking forty-third in state and local taxes while North Carolina ranks twentieth according to the Tax Foundation. Not coincidentally, Texas was one of only six states gaining jobs last year.
Emerging Plan Gores Ox?
According to the latest reports, North Carolina's tax revenues have fallen off a cliff like Wile E. Coyote in a road runner Cartoon, crashing 21% in April. Legislators scrambling for money have an excellent vehicle to grab more cash away from productive people through the State Senate Finance Committee Democratic Co-chair’s cunningly named 21st Century Tax Rate Reduction and Modernization Plan.
Wake County Republican Neal Hunt says, "Everybody's getting gored a little bit,” but under the plan, some people will be gored with paper horns.
The 21st Century plan reduces the sales tax rate from 6-3/4-percent to 6-percent while extending it to services like automobile and home repairs and warranties, digital products and information, undefined personal services, entertainment and moving. But wealthy groups with powerful lobbies like lawyers and doctors are exempted (whether call girls fall under the category of entertainment or personal services isn’t clear). An analysis by the Pope Foundation-funded Civitas Institute shows that the effect of lower rates and a broader base is actually a $150 million sales tax hike at the state level and another half a billion in local taxes.
Economic developers tout the plan’s reduction in corporate income tax from 6.9-percent to the lowest tax in the country of 4.5-percent among states which impose a tax on corporations. While special tax credits are scrapped in the plan, Wayne Harris, Albemarle Economic Development Director, remarked that, “The beauty of being able to say our rate is 4.5-percent outweighs all that,” casting doubt on the value of incentives in creating jobs.
And even as the plan is being put forth, lawmakers are moving forward with legislation continuing handouts for targeted corporations, indicating that North Carolina has no intention of getting out of the incentives game, regardless of the corporate tax rate.
The reform extends the franchise tax on limited liability companies for the first time. Overall, it raises taxes on business the first year and cuts them the second year, though the break may be slanted against small business in favor of big business.
Finally, the personal income tax changes prove everyone’s ox isn’t getting gored. It takes the form of classic income redistribution, taxing some people at substantially higher rates so others can pay less or nothing. Under federal tax law, the top 10-percent of earners pay 70-percent of income taxes and the top 50-percent pay 97-percent of taxes. Currently, the top 20-percent pay four times more of their income in income taxes (remember, that’s as a share of what they make, so they pay a higher percentage) than the bottom 20-percent. And incredibly, while income taxes will go up $600 million, 90-percent of filers will pay less. The top 10-percent get milked for the whole barrel.
Hasn’t anyone in Raleigh read The Little Red Hen?
Trial Run
A recent fight between the NC Department of Revenue and interior designers provides a glimpse of what could happen with a service tax. In 2008, the Revenue Department ruled that even if a designer sold only one piece of furniture, sales tax was due on consulting services related to it. In effect, if an interior designer gave advice about decorating an office while selling a lamp, the state demanded a cut on the consulting fees, applying the sales tax to labor income and charging back taxes, penalties and interest . A subsequent lobbying blitz by interior designers pushed the legislature to prohibit sales taxes on interior design services.
Battle Lines
Proponents of taxing services argue it’s unfair to tax buying a lawn mower while not taxing people who hire a lawn service. But that ignores the fact the lawn service was taxed on its mowers.
The California Taxpayers Association maintains service taxes discriminate against small businesses which contract for legal and accounting services while large corporations can hire in house counsel and avoid the tax.
Senator Hoyle and his colleagues should have learned from the experience in Florida, where a tax on advertising and professional services like lawyers was repealed in 1987 after only six months, following a lobbying campaign by groups ranging from national advertisers to music teachers.
It won't come easily in North Carolina.
Big Dog Hasn’t Barked
While the outlines of the plan are on the table, Democratic Senators obviously can’t make up their minds until Senate President Pro Tempore Marc Basnight makes up his. According to a Basnight aide, "he has not weighed in on it at this time.” Meanwhile, early rumblings from the House indicate that they may have a different plan in mind.
Regardless of who pays, there’s no doubt that someone will. State government spenders are hungry.
