Curing the Structural Defect in State Tax Systems: Expanding the Tax Base to Include Services

The state retail sales tax in America can be likened to an illegitimate child that was not wanted but that came anyway. At least that is how one economist has described the sales tax. He went on to state, Being unwanted is not really unusual and it is certainly no bar to normal growth. It is even possible for the illegitimate to gain respectability. Apparently, the sale tax has gained respectability. Less than eighty years ago, there was no such tax in the United States. In 1932 Mississippi introduced what is the modem-day sales tax. Since then, forty-four states have enacted some version of a retail sales tax with Vermont the last in 1969. Today, there are five states without a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Economists measure the respectability of the sales tax not only by its explosive growth, but also by the amount of revenue it contributes to the states. In 2008 states collected $240.4 billion in general sales tax, which was less than the $279.1 billion states collected in personal income tax. If selective sales taxes are included, however, the total sales tax is $357.3 billion, far exceeding the personal income tax. Beyond that, from the states\u27 perspective, it is a relatively easy tax to administer because vendors collect the tax from consumers and then remit the funds directly to the state. ... When enacting the sales tax, states excluded services from taxation largely because, in those times, goods dominated the economy. Times have changed. Services now dominate the economy, but states still do not tax services to a wide extent. This structural defect in state taxing systems causes a substantial gap between needed revenue and actual revenue. This Article explores the sales tax, its history, and its structural defect. The Article advocates expanding the tax base to include services to cure the structural defects in state taxing systems