“We’ve got to stop governing like this.” Policy cognoscenti will recognize the admonition from the landmark 2007 report by former Gov. Joe Kernan and then-Chief Justice Randall Shepard calling for a sweeping overhaul of state and local government. But the call to action is just as apt to describe the lopsided way the state taxes business.
Lawmakers should pass legislation to tax services ranging from legal fees to hair cuts in addition to the cars, shoes and other items the state has taxed for decades. Adding services would broaden the tax base, help lower-income people, and remove consumer incentives to spend more in one part of the economy than another.
Indiana is painting itself into a corner by relying ever more on taxing tangibles, a study by the Indiana Fiscal Policy Institute shows. Lawmakers have pushed the tax rate higher and higher to compensate for consumers’ spending less of their incomes on things and more on services. Retail sales of tangible goods shrank from 55 percent of state personal income in 1970 to 40 percent in 2013, yet taxes on that base exploded from 20 percent of all state tax revenue to 40 percent.
The tax rate now is a towering 7 percent, and is even higher—8 percent—on food and beverage purchases in Marion County. How would we all like to pay 9 percent someday? Ten percent, anyone?
Some of the greatest benefit to taxing services would fall to low- to moderate-income people, who spend a greater part of their income on tangibles. And taxing both services and tangibles at the same rate would eliminate the built-in price bias against tangibles. If a $100 pair of shoes costs $7 more due to the tax, you might be more inclined to spend that $100 on someone preparing your taxes.
Services could increase the total tax base as much as 85 percent, the study said. That doesn’t mean overall tax revenue would need to rise. Taxes on tangibles could be cut to make the change revenue-neutral.
Slashing taxes on tangibles also would minimize incentives Hoosiers have to cross state borders to buy where taxes are cheaper, says study author John Mikesell, an Indiana University tax expert. That’s important when many residents work in metro areas in neighboring states.
It goes without saying that such a proposal would spark a battle royale at the Statehouse. Every funeral home, auto detailer and investment counselor would line up against it. Indeed, former Senate President Pro Tem Robert Garton killed the idea in the 1980s, and Garton successor David Long and House Speaker Brian Bosma slapped down the new study shortly after it was unveiled, suggesting they weren’t currently interested in opening this can of worms.
However, political leaders should take the long view. No tax on services should be across the board. Businesses shouldn’t be hit for services they use, for example, since that would create an unfair scenario in which companies are socked with sales taxes over and over as a product moves through production.
But lawmakers should start talking up a changeover. We’ve got to stop taxing like this.•
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