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Location: Nashville, Tennessee, United States

5/30/2002

The Dis-service Tax
Rob Ikard, state director for the National Federation of Independent Business, has written an excellent analysis of the proposal to extend the state sales tax to services, a proposal that is still kicking around the state legislature as an alternative to the state income tax.

Says Ikard: "Not only would Tennesseans be paying more for goods and services. This measure would also harm the ability of Tennessee's businesses to create wealth and jobs. Because the services that all businesses buy would be more expensive, fewer private sector dollars could go toward increased wages or benefits, adding new jobs, or purchasing wealth-creating capital. And because every business in Tennessee would be raising its prices to keep up with the tax increase, Tennessee's businesses would be at a disadvantage relative to competitors in surrounding states."

Also, says Ikard, taxing the purchase of services would disproportionately hurt small business: "Tennessee's small business economy creates jobs 2 to 3 times faster than the biggest companies, and the tax increase would impact small business the most. The state's bigger businesses can more easily hire accountants, lawyers and engineers, bringing them "in house", thus avoiding the service tax. Smaller businesses are more likely to purchase those services on the outside, forcing small businesses to shoulder a proportionally greater share of the tax."

An argument could be made that extending the sales tax to services while lowering the rate to keep the tax code change revenue-neutral might have a touch of fairness to it. It might be argued that taxing the purchase of services in some form would better reflect today's modern economy in which a larger share of consumer purchases are of services - paying landscapers instead of buying a lawnmower, for example. I, for one, would suggest such reform would exempt businesses from paying the tax when they buy services, because businesses do not really pay taxes but pass them on to consumers via higher prices, lower wages, fewer jobs and less R&D.

Unfortunately, that isn't the kind of well-thought-out, carefully-crafted tax reform that is being proposed right now. The sales tax expansion on the table is designed solely to raise a billion or so more dollars for the legislature to spend, and it will do so in a way that will bludgeon the economy and the small businesses that are its life force.

The real solution, of course, is for the legislature to match spending with existing revenue - and avoid harming the state's economy with a mammoth tax increase. Legislators discussing anything else are doing small business, the economy - and you - a gross disservice.