Taxing Haircuts and Lawyers

Any policy maker or member of the public considering whether to support a particular tax proposal should ask themselves this question: You want to preference group A [by giving them a tax break or taxing everyone but Group A], why do you want to penalize everyone outside Group A? The vast majority of states in the country have a retail sales tax. In Minnesota, we exempt food and clothing for our sales tax, which puts less burden on low-income individuals. The state does tax plenty of goods – including restaurant food, electronics, coffee at Starbucks, etc. Coffee drinkers and athletes all pay a little extra when they buy their Starbucks coffee or their Nike shoes. However, when a lawyer submits a bill for services in filing for divorce, the person paying the lawyer does not pay a sales tax. Hire a public relations firm? Zero taxes. A trip to the tanning salon? Zero tax. A person who buys a lawnmower is taxed, but a person who hires a lawnmower service is not. .

The end result: A distorted sales tax system. Almost any economist would say from that a tax on some services and goods but not all creates economic inefficiencies, or an incentive for people to buy the untaxed goods. What Minnesota has lacked is a reason why: Why is our tax policy to preference public relations firms and lawyers over snowmobile purchasers?

Back when “the Body” was Governor, Ventura proposed broad-reaching tax reform which would have lowered the sales tax rate, while expanding the reach of our state sales tax to services such as lawyer fees, haircuts, etc. Estimates put the amount of revenue raised by this change at about $500 million a year. His tax-cutting-base-broadening proposal was promptly declared dead-on-arrival at the state legislature. Lobbyists for business interests lined up against the idea. Relations between the Governor and the Legislature were not good, and this likely did not help the chances for a discussion on the merits of the proposal. In any event, this issue needs revisiting.

In the meantime, we can look to Maine, which recently took up a sales tax base broadening proposal. The Center on Budget and Policy Priorities has a quick analysis at: www.cbpp.org/2-1-07sfp.htm