Expanding the Sales Tax to Selected Services: A Sound Alternative to Raising Rates

When you buy a brush to groom your dog, you pay DC sales tax.  But if you take your dog to get groomed, you pay…

No sales tax.

When you buy a pack of diapers, you pay DC sales tax.  But if you call a diaper service to bring you clean diapers, you pay…

That’s right: no sales tax.

It’s a pattern that shows up over and over again.  When you do the work yourself, you pay sales tax.  But when you pay someone else to do it, you don’t.  What’s the deal?

The District just recently voted to raise the sales tax by ¼ of a percent to help close its budget shortfall.  But a more sound approach would have been to keep the rate steady and instead expand the sales tax to cover more services.

Why would DC want to expand the sales tax to cover more services?  A new report by Michael Mazerov from the Center on Budget and Policy Priorities explains why many states are expanding their sales tax to cover services like auto repair and dry cleaning.

For one, we no longer spend as much of our total income on goods – like shoes and refrigerators.  The share of household purchases going for goods declined from 39 to 32 percent over the past 30 years, according to the report, while consumption of services rose from 31 to 45 percent of household purchases over the same period.

Second, expanding the sales tax to more services would make the sales tax more equitable.  Taxing only certain businesses’ goods can put them at a disadvantage over other businesses that solely provide services.  Also, it isn’t fair to require someone to pay sales tax when they buy a good but not tax others when they pay for essentially the same thing as a service.

Third, expanding the sales tax to more services can limit the need for rate increases.  The sales tax is regressive – meaning low-income residents pay a higher share of their income in the tax than higher-income households.   Applying the sales tax to services – which are more likely to be used by higher-income households – is less regressive than increasing the sales tax rate while leaving services exempt.

So what would this mean for DC?  DC already taxes some services – such as landscaping, dry cleaning and electricity, but not others – such as pet grooming, investment counseling and diaper services.  Expanding the sales tax to cover more services could help maintain the adequacy of the sales tax and improve its equity.  It could also help DC raise some much needed revenue, without increasing the sales tax rate, at a time when DC – and virtually every other state – are scrambling to close revenue shortfalls.