Overview

While sales taxes often contribute to tax inequality, they can be made fairer by broadening the tax base of goods and services covered, especially with an eye to taxing legal and financial services used more heavily by richer consumers.

58% of consumer consumption is for services rather than goods.  The fact that most sales taxes do not cover services skews the tax burden towards those, often the poorest consumers, who spend more on physical goods rather than services.  Broadening the base of services taxes can allow a state to lower the overall sales tax rate.  For example, Hawaii and New Mexico, which have relatively low state sales tax rates of 4% and 5% respectively, tax more of the 168 services surveyed by the Federation of Tax Administrators than any other states (160 and 156 respectively).  

Such a broadening of the sales tax can also raise significant revenue.  According to a report  by the Center for Budget and Policy Priorities, sales taxes on services could bring states tens of billions of dollars in new income.

• Center for Budget and Policy Priorities - Expanding Sales Taxation of Services: Options and Issues, Revised
• New Jersey Policy Perspectives (NJPP) - Making the State Sales Tax Pull Its Weight