Freedom Line Blog

A Governing.com blog post by finance writer Liz Farmer includes a little history lesson for conservative governors looking to swap income tax cuts for higher sales taxes.  In order to avoid a massive drop-off in tax revenue in such a scenario, states would be obliged to not only increase their sales tax rate, but expand it beyond goods to include services as well.

But an example from Florida’s recent past gives reason to pause:

Expanding the sales base to include services would address both of those issues. However, getting that idea past the powerful lobbies that advocate for the affected industries is another question. In 1987, the Florida Legislature enacted an expanded sales tax on services like including advertising, legal, accounting and construction services. The move was met with enormous outcry. Major corporations like Coca-Cola and Procter & Gamble canceled or reduced their advertising in the state to protest the tax while business groups canceled at least 60 conventions they had booked in the state. The tax lasted just six months until it was repealed and the legislature instead voted to raise the sales tax from 5 percent to 6 percent, a rate that is still in effect today.

It’s worth noting that a tax expert quoted in the blog confirms that income taxes are the most destructive tax because they create a disincentive to build wealth.  However, as the experience in Florida shows, a workable sales tax runs the risk of becoming quickly unpopular once consumers start seeing the true cost of government on every commercial transaction.

Assuming some states do enact the income-for-sales-tax swap, maybe the sticker shock will prompt another round of reform; one that perhaps lets third-party vendors compete for government contracts to deliver services at a fraction of what it costs to fund a bureaucracy.