IBJNews

Study: Taxing services could yield state $6.8B

Back to TopCommentsE-mailPrintBookmark and Share

The non-partisan Indiana Fiscal Policy Institute this morning released a new study exploring the ramifications of expanding the state’s sales tax to include services.

In its last fiscal year, Indiana raised $5.7 billion from its 7-percent sales tax, which applies to the sales of most tangible goods, with exemptions for items such as prescription drugs, groceries and newspapers.

According to the IFPI study, Indiana could raise as much as another $6.76 billion annually if it extended its sales tax to include all service transactions. Even if Indiana exempted medical and legal services, Indiana could raise almost $4.5 billion from an expanded sales tax, according to IFPI.

Such figures are sure to appeal to legislators in Indiana’s General Assembly, who struggled mightily over recession-driven spending cuts this spring. A special session of the Legislature was ultimately necessary to craft a two-year state budget.

Indiana government’s economic picture hasn’t improved much since then. On Oct. 8, Gov. Mitch Daniels revealed Indiana’s revenue for the quarter ended Sept. 30 was $254 million less than previously predicted, despite the fact that Indiana’s revenue forecast has been repeatedly revised downward.

New revenue could help fill such gaps. But an expansion of Indiana’s sales tax has many potential drawbacks, which the IFPI study details.

For starters, Indiana’s 7-percent state sales tax is already the highest in the Great Lakes region. Extending it might prompt Indiana residents to seek services elsewhere. Indiana is currently tied with Mississippi, New Jersey, Rhode Island and Tennessee for the second-highest sales tax in the nation. Only California's 7.25 percent tax is higher.

The IFPI study points out that the effective sales tax rate is actually higher in some regions because of local sales taxes tacked onto state sales taxes. Alabama, for example, has a 4-percent sales-tax rate, but certain localities there have their own 6-percent sales taxes, creating a 10-percent total tax.

Most states, including Indiana, already tax a few services, such as public utilities, hotel-room rentals and stadium admissions, according to IFPI. But only a handful, such as South Dakota, West Virginia, Hawaii, New Mexico, Delaware and Washington, tax more than a handful of services.

Indiana currently ranks 39th among states for the number of services it taxes, taxing 24 of 168 services surveyed by the Federation of Tax Administrators.

The logistics of expanding the sales tax to additional services would be challenging for some businesses. IFPI points out it could be difficult for many businesses to levy such a tax. Businesses that already sell some goods would have an easier time than pure-service providers. For example, a cosmetologist that now collects taxes on the shampoos and conditioners its sells while exempting styling services, would simply have to stop segregating taxable and nontaxable sales.

But other businesses that sell no tangible goods would find they suddenly must establish a relationship with the Indiana Department of Revenue and maintain a whole new type of record. The cost could be significant, IFPI points out, particularly for small businesses.

“Of the major sources of revenue available to the state, broad-based taxation of services is the only one yet to be tapped by the State of Indiana,” wrote the IFPI report’s author, Earl Ryan. “The revenue possibilities are great, and it would bring a degree of equity to the tax system. At the same time, defining the base would be difficult, both conceptually and politically, and the cost of collecting the tax on the part of both the state and the taxpayers would be significant.”
 

ADVERTISEMENT

  • Lil Brute
    If a GET is implemented, the tax rate should drop to around 4%.
  • WoW
    This give government another nine million by the time they overspend it, Disgusting. time for another tea party.xoxo
  • ...unless those accountants get taxed as well...
  • How about we allow beer and liquor sales on Sundays. Just think of the tax revenue the state could gain on that...
  • Wow, this will hurt freelancers (but help accountants).
    • About time.
    • You haven't looked at Nebr. apparently.
      7% sales, double + vehicle taxes, property
      taxes unbelievable, cost of living unbelievable!

    Post a comment to this story

    COMMENTS POLICY
    We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
     
    You are legally responsible for what you post and your anonymity is not guaranteed.
     
    Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
     
    No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
     
    We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
     

    Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

    Sponsored by
    ADVERTISEMENT

    facebook - twitter on Facebook & Twitter

    Follow on TwitterFollow IBJ on Facebook:
    Follow on TwitterFollow IBJ's Tweets on these topics:
     
    Subscribe to IBJ
    1. I am not by any means judging whether this is a good or bad project. It's pretty simple, the developers are not showing a hardship or need for this economic incentive. It is a vacant field, the easiest for development, and the developer already has the money to invest $26 million for construction. If they can afford that, they can afford to pay property taxes just like the rest of the residents do. As well, an average of $15/hour is an absolute joke in terms of economic development. Get in high paying jobs and maybe there's a different story. But that's the problem with this ask, it is speculative and users are just not known.

    2. Shouldn't this be a museum

    3. I don't have a problem with higher taxes, since it is obvious that our city is not adequately funded. And Ballard doesn't want to admit it, but he has increased taxes indirectly by 1) selling assets and spending the money, 2) letting now private entities increase user fees which were previously capped, 3) by spending reserves, and 4) by heavy dependence on TIFs. At the end, these are all indirect tax increases since someone will eventually have to pay for them. It's mathematics. You put property tax caps ("tax cut"), but you don't cut expenditures (justifiably so), so you increase taxes indirectly.

    4. Marijuana is the safest natural drug grown. Addiction is never physical. Marijuana health benefits are far more reaching then synthesized drugs. Abbott, Lilly, and the thousands of others create poisons and label them as medication. There is no current manufactured drug on the market that does not pose immediate and long term threat to the human anatomy. Certainly the potency of marijuana has increased by hybrids and growing techniques. However, Alcohol has been proven to destroy more families, relationships, cause more deaths and injuries in addition to the damage done to the body. Many confrontations such as domestic violence and other crimes can be attributed to alcohol. The criminal activities and injustices that surround marijuana exists because it is illegal in much of the world. If legalized throughout the world you would see a dramatic decrease in such activities and a savings to many countries for legal prosecutions, incarceration etc in regards to marijuana. It indeed can create wealth for the government by collecting taxes, creating jobs, etc.... I personally do not partake. I do hope it is legalized throughout the world.

    5. Build the resevoir. If built this will provide jobs and a reason to visit Anderson. The city needs to do something to differentiate itself from other cities in the area. Kudos to people with vision that are backing this project.

    ADVERTISEMENT