By Michael Bielawski Vermont Watchdog.org Democrat gubernatorial candidate Sue Minter says her proposal to expand the sales tax to services will be aimed at the wealthiest Vermonters. While barbers are apparently safe, she might inadvertently clip a few high schoolers on prom dates or skydivers out for a weekend of fun. Economists say keeping the tax narrow essentially defeats the purpose and means it won't do much except create more red tape for government and business.
“I will not add any new tax or services that will hurt middle-class Vermonters,” Minter said last week. “I will not add taxes on your haircut or mine.”
Instead, Minter said, her expanded sales tax plan would target activities such as limousine rides and small airline service.
She proposes cutting the 6 percent tax burden on the sales of goods while expanding it cover some services, and says that could allow the sales tax rate to drop to 2 percent.
Typically, that's an idea economists support.
“It’s always a good idea to have a lower tax rate and a broader base to raise a certain amount of money,” said University of Vermont economist Art Woolf. “In general I would favor expanding the base and lowering the rate of any tax, including the sales tax.”
The problem is politics, not economics.
Services account for about two-thirds of the economy. But with huge swaths exempted, economists say lowering the rate to 2 percent is a non-starter if the idea is to increase revenue or keep the tax revenue neutral.
When Minter first brought up the notion of expanding the sales tax a few weeks ago, she referenced the Blue Ribbon Tax Commission, which endorsed the tax by a two-to-one vote years ago.
Economist Bill Sayre was the no vote.
Sayre noted that education and health care alone account for more than half of the total service economy, and those industries almost certainly would insist on an exemption. He added that once you bring in the additional criteria of targeting services for the highest-earners, then the potential impact of Minter's plan becomes negligible.
“Once you eliminate all of the services that will want an exemption, and try to imagine only services that are used by high-income people, you are talking about a fraction of 1 percent," said Sayre. "And the result is you won’t get any real reduction in the sales tax rate at all.”
Woolf reiterated that point.
"By adding a tax on services that are only consumed primarily by upper-income people, of course what do you mean by the middle class is the first question but, you'd be hard pressed to think about services that are only consumed by upper-income people. There might be some, but it's not going to raise a whole lot of money if you start limiting it like that."
Woolf and Sayre are both conservative economists who also are well known to the public. Woolf writes a regular column for the Burlington Free Press and Sayre has a daily radio program on WDEV in Waterbury.
Woolf years ago did an in-depth study of what the initial sales tax did to retail businesses along the Connecticut River versus those across the river in New Hampshire. He says Minter's proposal would only exacerbate that scenario.
“With any tax, you’ve got incentive effects and border effects,” he said. “If you add services, you are going to potentially drive businesses out of Vermont and into states without that tax, so that’s always a problem.”
Sayre also noted the added costs to business and government at administrating a new tax; those costs are higher the more complicated it becomes.
“A lot of times people forget that the cost of the tax is more than just the size of the check that’s made to pay the tax,” he said. “It’s also the cost of complying with the regulation and the cost to the government of monitoring and enforcing the regulation.”
Sayre said the state would have to hire more personnel to audit, monitor and enforce the tax. And it would create more work for business owners.
“The last thing you would want is people coming home from working in a lawn care business or cutting hair and having to spend a half an hour or an hour every evening on paperwork,” he said.
Source: Vermont Watchdog October 3, 2016. Contact Michael Bielawski at [email protected].