Indiana: Expanding Sales Tax to Services
- Apr 14, 2015 | Gail Cole
The retail sales tax base in Indiana is shrinking. That’s a problem, since Indiana relies on sales tax revenue to fund many state services.
According to a study authored by the Indiana Fiscal Policy Institute (IFPI), the base was below 40% of state personal income in 2013, as compared with roughly 55% in 1970. This in spite of the fact that household consumption spending has increased.
The cause is no mystery: people are simply spending less on taxable goods and more on untaxed services. In applying the sales tax to more services, says the IFPI, additional revenue could be maintained without raising the rate of tax. Alternatively, current revenue levels could be maintained with a lower rate.
The IFPI lists several good reasons to consider broadening the sales tax base. Such a move would:
- Reduce the regressive nature of the sales tax
- Reduce the difference in sales tax burdens borne by households of similar incomes
- Increase sales tax revenue
- Increase responsiveness to changes in state personal income
- Tax all household purchases equally
That said, the IFPI acknowledges potential pitfalls of expanding tax to services, including the following:
- Sales tax is by nature regressive
- State revenue would not be protected from recessions
- “Considerable attention” would be required to guarantee that the tax does not apply to “service purchases made as business inputs.”
Ultimately, the study argues that broadening sales tax is neither impractical nor infeasible. Barriers to doing so, it insists, are “more political than technical.” Whether or not the study encourages Indiana politicians to tax services remains to be seen.
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