Taxing Services - Michigan

An article today in the Detroit Free Press says that Governor Granholm has given up on a tax reform plan to extend the sales tax to services and lower the rate. That is too bad.

In 2007, the Michigan legislature did extend the sales tax to specified services, but then repealed it the day it was to go into effect (see prior post). Problems with that original proposal included:

• There was insufficient transition time for the law to take effect - just 2 months. That is not enough time for the tax agency and the businesses, such as palm readers and house sitters, to get ready to collect the tax. So, unfortunately, the initial legislation was really written with a time bomb that would lead to repeal - that was unfortunate. More time should have been given before implementation and funds allocated to help both the tax agency and the new tax collectors get ready.


• Do not tax services primarily used by businesses. Businesses should not pay sales tax, only final consumers. This prevents pyramiding of the tax where businesses add it to their costs and consumers pay tax on that amount. While most of the services identified in 2007 were personal ones, there were others, such as landscaping, also consumed by businesses.


• The base expansion was not accompanied by a rate reduction !!
  

The purpose for expanding the sales tax base is to tax all personal consumption (with limited exceptions, such as for basic health care and education). This makes the system more equitable. The law is inequitable when for example, it taxes a music CD, but not an iTunes download or concert ticket. And worse, some of the exempt consumption is by high income taxpayers (personal trainers, concert tickets, downloads requiring broadband access, etc.).

It is also important for lawmakers to squelch the loud but misplaced arguments that the tax will hurt small businesses. Small businesses that sell tangible personal property have been collecting sales tax for decades and surviving. The collection process won't hurt small businesses and the initial implementation costs should be subsidized with a refundable income tax credit. And, tax agencies should be required to find simple ways for companies to comply.

I've written about this for some time now. It is an issue that California needs to address as well. California should broaden its sales tax base to tax more types of personal consumption while lowering the rate and removing the sales tax paid by businesses to remove pyramiding. For more - click here ("tax base is too narrow").

What do you think?