One of the measures facing Missouri voters this fall is Amendment 4, which would modify the state constitution to prohibit future expansions of state or local sales taxes to “any service or transaction” not already included in the tax base.
This amendment would severely restrict Missouri’s ability to adjust its sales tax in the future to adapt to economic changes. As we have written elsewhere, expanding the sales tax base to include consumer services is a reform needed to bring state tax codes into better alignment with the 21st century economy, improve the sustainability of sales tax revenues and the many vital services they fund, reduce upward pressure on sales tax rates and other taxes, and remove arbitrary and unfair distinctions in what’s taxed and what’s not. Banning such expansions would prevent any of these benefits from being realized in Missouri.
Most state sales taxes, including Missouri’s, apply to purchases of physical goods but not to most services. And in most cases this is simply because sales tax codes were created in the 1930s when services were neither a large part of the economy nor feasibly tracked and taxed. But while the economy has shifted substantially over time – services were 67 percent of household consumption in 2015 and technology has made it much easier to apply and enforce taxes on services – most state sales taxes have not kept up with the times. A 2007 Federation of Tax Administrators survey identified 168 services taxed in at least one state. Missouri’s sales tax came in as even more outdated than most, taxing only 26 of those services, fewer than all but 12 states.
And the stakes are not low. Sales and similar taxes are crucial revenue streams for states and local governments, making up nearly half of state tax collections nationwide in Fiscal Year 2014-2015, and 43 percent in Missouri specifically. But as currently constituted, they are an unsustainable revenue source. As the economy shifts and sales taxes like Missouri’s remain stuck in the past, state and local revenues and the services they pay for can suffer. In the words of the Missouri Municipal League, which opposes Amendment 4, its approval “could lead to a significant reduction in vital local services, such as police, fire, street maintenance, parks and more.”
To avoid such service cuts without expanding sales taxes to services, the only options are raising sales tax rates or increasing other taxes or fees. At the state level this generally means upward pressure on personal and corporate income taxes, while at the local level the only significant revenue option other than sales taxes is usually the highly unpopular property tax.
Sales taxes, including those on services, are regressive or weigh more heavily on lower-income families than those higher up the income scale. This is a crucial consideration and a strong reason to avoid relying too heavily on sales taxes, but that can be mitigated with targeted credits like the Earned Income Tax Credit and other means that benefit those lower-income families, or by using revenue gained from expanding the sales tax base to reduce the sales tax rate. It is harder to mitigate the fact that taxing goods while exempting services arbitrarily favors the consumers and providers of services over similarly situated people who just happen to purchase or sell goods. And when shrinking tax bases force sales tax rates higher, the wedge between these two groups is driven wider, exacerbating the unfairness as well as any economic distortion it may cause.
Constitutionally banning sales tax modernization in Missouri would prevent the state from matching its sales tax to the economic realities in 2016, much less keeping up with economic changes and technological advances that are yet to come. If the amendment passes, other states should consider it a cautionary tale rather than an example to follow.