Despite Opposition, States Eye Tax on Services

June 17, 1987 2 min read

William Montague

Hard pressed to provide the funds for expensive education reforms and other vital needs, state governments are increasingly seeking to tap a lucrative new source of revenue: sales taxes on services.

Despite the fierce opposition of many business and professional groups, a growing number of legislatures are moving to claim a share of the new wealth being created in the service sector--by far the fastest-growing segment of the nation’s economy.

Although all but a handful of states tax the sale of business and consumer goods, many have long exempted the purchase of personal and professional services, such as those of lawyers, real-estate brokers, and hairdressers.

But the political costs of the new levies can be considerable, many observers note.

When the Florida legislature moved recently to extend its 5 percent sales tax to cover a variety of services, including advertising, it triggered a bitter battle with the national advertising industry. Industry lobbyists have organized boycotts and filed a lawsuit with the state Supreme Court in an effort to have the levy repealed.

Despite such controversies, many fiscal experts say taxes on services are an inevitable byproduct of modern economic trends, especially in the fast-growing Sunbelt states.

“There are formidable political obstacles,’' said Steven D. Gold, a policy analyst for the National Conference of State Legislatures, “but this is clearly something that will continue to develop.’'

For most of the past decade, the growth in the service sector has far outpaced that in the rest of the economy. The total receipts of consumer-service companies, such as hotels, beauty shops, and amusement parks, nearly doubled between 1977 and 1984, according to the U.S. Census Bureau.

Because many service industries are not as vulnerable to recession as the manufacturing sector, analysts say, service taxes can, to some extent, cushion states against economic downturns. And, they add, it is more difficult for a service company to pick up its operations and flee to a lower-tax state.

In addition to Florida, service taxes have been proposed this year in at least seven other states, according to Mr. Gold and interviews with state officials. But only two--Florida and Minnesota--have succeeded in passing such a levy.

In Illinois, Gov. James R. Thompson abandoned his service-tax proposal in the face of “overwhelming apathy’’ on the part of legislators, according to David Fields, a spokesman for the Governor.

But without additional money, Mr. Fields said, the state is facing the probability of deep budget cuts in several programs, including education. The legislature is currently considering increases in other, more traditional revenue sources.

Opposition from business groups has also defeated proposed service taxes in Washington, Indiana, and Oklahoma, according to officials in those states.

The bitter legislative battle in Florida, said Mr. Fields, combined with the advertising industry’s anti-tax campaign, has caused many state leaders to shy away from the subject.

“When you see the entire advertising industry threatening to boycott the state of Florida, it obviously scares a lot of people,’' he said.

But other observers see Florida’s action as a major victory, one that will encourage other states to follow suit.

And that is the very reason that advertisers are waging such a fierce struggle in the state, charged John Peck, a spokesman for Gov. Bob Martinez of Florida.

“They know that if we succeed here,’' he explained, “everybody else will start doing it.’'

A version of this article appeared in the June 17, 1987 edition of Education Week as Despite Opposition, States Eye Tax on Services