Service tax is tough sell here, elsewhere

THIS year, Gov. Mary Fallin called for applying the state’s 4.5 percent sales tax to numerous services, which would have increased taxes $839.7 million annually. Once you added in associated sales taxes from cities and counties, the total tax increase may have run as high as $1.7 billion.

Fallin offset some of that with other tax cuts, but the net effect remained a large tax increase. The plan died in the Legislature, based in part on strong public opposition.

Fallin wasn’t the only official to consider taxing services this year, nor was she alone in seeing the idea rejected. Given that officials continue to indicate a tax on services remains under discussion, it’s worth noting why the idea has fared so poorly nationwide.

Stateline, a publication of the Pew Charitable Trusts, reported in late June, “Twenty-three state legislatures considered proposals this year to impose taxes on at least some services. But so far, none has made it into law intact — and most died outright.”

West Virginia Gov. Jim Justice, a Democrat, called for taxing services, including things like trash hauling, funerals, barbering, telecommunications and nonmedical personal services.

When that state’s legislature adjourned, no tax increases had been approved. One reason for this, in West Virginia and Oklahoma, is that service taxes that generate revenue are strongly opposed by the affected businesses and customers. (Taxing funeral services quickly becomes a “tax on death.”) And services that don’t have strong lobbies are those that won’t generate much revenue.

Another problem identified by Stateline is that state lawmakers struggle to define what specific services are taxed. North Carolina in 2016 expanded its sales tax to include some services. Since then, “the Department of Revenue has been flooded with questions about what is taxable and what is not,” Stateline reports.

In North Carolina, roof repair is now taxable; roof replacement is not. If a homeowner builds an addition that includes a new bathroom, the new construction is not taxable. But unclogging a drain is taxable. North Carolina lawmakers have even debated whether to differentiate the kinds of garden care subject to the tax (indoor gardens would be exempt; outdoor gardens would not).

In Ohio, the tax on snow removal services applies only to services that use trucks and snow blowers, but not to services using a shovel.

Similar issues arose in Oklahoma. Rep. Jason Murphey, R-Guthrie, warned that taxing computer services had been tried in other states without success. Massachusetts, Maryland and Pennsylvania had all enacted and then repealed “tech taxes” through the years. Murphey warned that one proposal under consideration in Oklahoma was so poorly defined it could have involved taxing even “the entering of data into a computer.”

That tax never came up for a vote, perhaps due in part to Murphey’s critique.

Fallin has indicated she will continue to push for a tax overhaul next year, and legislative studies have been approved to review the broader tax issue. Lawmakers considering a tax on services must address all the logistical problems noted above and also, most importantly, demonstrate to Oklahomans that what they gain will be worth at least as much as what they lose in new taxes.