The Uneasy Case for Extending the Sales Tax to Services

Commissioned in connection with a symposium in the Florida State University Law Review, this article examines the issue of whether to extend the retail sales tax to cover services. During the past fifty years, the U.S. economy has shifted from one based primarily on the production of goods to one dominated by the provision of services. Policymakers in several states have argued that the current sales tax base, which was established during the early 1930's, should be reformed because it currently fails to reach most services. I examine the principal arguments for and against the expansion of the sales tax base to cover services and conclude that, on balance, the case for reforming the sales tax in this manner is not persuasive. If state policymakers insist on broad-based consumption taxes, the retail sales tax is arguably the least effective levy in accomplishing that goal. The shortcomings of the retail sales tax as a broad-based consumption tax are traceable to the design of the tax as a point-of-purchase transactions If the goal of sales tax reform is to reach all personal consumption, as advocates of taxing services suggest, states should consider alternative consumption taxes, such as the cash-flow (consumed income) consumption tax or a modified subtraction method value-added tax, such as the Hall-Rabushka flat tax. The article offers some preliminary thoughts on the problems and complications involved in employing these alternative consumption taxes at the state and local level.