More on states needing more tax revenue

Yesterday I wrote about a creative strategy the state of California is pursuing to close their budget shortfall.  Today, the New York Times writes about states across the country doing the same.  They are primarily looking for more revenue through expanding the sales tax to services, an historically fitting move since the sales tax was first initiated during the Great Depression.

Legislatures across the country are basically seeking to modernize their tax code, as they realize it taxes products much more heavily than services.  This made sense for most of the 20th century, but it no longer does in a service-dominated economy; this is why you get taxed for buying a plunger but not for hiring a plumber.  So, in 2009, states cumulatively collected $230 billion of sales taxes, and the Tax Foundation estimates that the number would double if all services were taxed at the same rate.

But similar tax revisions were tried in 2007 but failed when confronted with general and special interest resistance.  The special interests will of course protest these expanded taxes, which could raise an extra $1.8 billion just for Michigan, but the unknown is how the economy will affect the political calculus this time around.  Necessity is the mother of innovation, so I am guardedly optimistic.

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