commentary

(Orange County Register)

January 30, 2003

Sales Tax on Services? Not So Fast

by Robert A. Levine

As Florida experience shows, targets of new levy have clout and will use it

As California faces its budget crisis, one suggestion - both for raising more revenue now and stabilizing the state's fiscal base - has been to broaden the sales tax to cover services. Although not included in Gov. Gray Davis' initial budget proposal, the proposal has entered political and press debate. Advocates contend that new revenue sources are badly needed and that taxing auto parts but not auto repairs, for example, is simply irrational.

They may have logic on their side, but the history of at least one such proposal in another state suggests that it ain't going to be easy. Any new tax source, indeed any increase, is subject to the pressures summarized by former Louisiana Sen. Russell Long: "Don't tax you, don't tax me, tax that fellow behind the tree."

In the mid-1980s, I was a consultant to the Florida State Comprehensive Plan Commission, charged by Democratic Gov. Bob Graham with finding new revenues for the booming state. The panel quickly focused on broadening the sales tax to cover services as well as goods. Like California's current tax, the existing tax preserved a modicum of progressivity by exempting food, which looms larger in lower-income family budgets; nobody proposed changing that. Also like California, the language of the tax law covered specific exemptions such as food and services rather than writing down specific inclusions beyond which everything else would be taxed.

The structure of the law made it possible to bring services under the sales tax simply by "sunsetting" their exemption - terminating it as of a given date. That was what the commission proposed and a deal was made in the Democrat- controlled Florida legislature to have it happen, quickly and quietly.

It could not be done before the 1986 election, however. That November, Graham was elected to the Senate. In a surprise, he was replaced by Bob Martinez, a Republican who did not make the services tax a partisan matter. Quite the contrary, he embraced it. Rather than slipping it through quietly, as had been planned, he made it a centerpiece of his policy.

That served to mobilize the people behind the trees. One press discussion of the proposed California services tax suggests covering "the fees lawyers and accountants charge, medical services, auto repairs, dry cleaning and a host of other daily transactions." But in Florida then as in California now, accountants, doctors and other medical providers, auto-repair people and cleaners not only voted but most of them were well-represented in the state capital. And as for lawyers, then and now, they are the Legislature, or at least they run it. It had taken a lot of politicking to get them to accept the quiet change; the loud one was more difficult to swallow.

The noise also woke up another group that had not been fully aware of what was going on. Services include not only the above categories, but also advertising. Advertisers in Florida media, particularly TV, were not mainly Floridians. They were out-of-staters, particularly New York ad agencies. Once the fact that they were about to be taxed sank in, they turned to the media recipients of their largess and suggested strongly that the press and radio and TV fight this truly unfair new tax.

Much of the media did oppose it vigorously. Together with the lawyers, accountants and dry cleaners, they prevailed; what had seemed a sure thing to be carried out in a low-key manner by powerful insiders never became law. Instead, rates on existing sales taxes were raised. And Martinez lost his re-election bid.

One part of the potential lesson does not apply to California in 2003: Broad changes in tax policy are not going to take place in back rooms. Sunsetting service exemptions to the sales tax will have to take place under the full glare of the sunshine laws enacted to make sure that public policy is made publicly. But the other part is very relevant. Broadening the sales tax base may seem reasonable to journalists, political scientists and economists. It is likely to seem less reasonable to the putative taxees.

Which may be why Gov. Davis didn't propose it.


Robert A. Levine is a RAND Corp. economics consultant.

This commentary originally appeared in Orange County Register on January 30, 2003. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.