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.
