Not so fast, more proposed tax changes that affect state budget

The budget passed by state lawmakers last week expanded the sales tax base to include additional services that are not currently taxed. Accordingly, the repair or upkeep of a vehicle, the repair of a broken washer or dryer, or the maintenance of an air conditioning unit will now be subject to the sales tax.

It appears that the weekend gave policymakers time for some second thoughts about their plan, however. This week, state lawmakers are now aiming to pass a bill that will roll back one particular aspect of the sales tax base expansion included in the budget.

House Bill 117 (HB 117) includes a provision that would exempt repair, maintenance, and installation services on tangible property and motor vehicles covered under manufacturer or dealer warranties from the sales tax. Accordingly, under HB 117, if your vehicle or tangible property is covered under a warranty then you don’t pay a sales tax on repair and upkeep services. To the contrary, if your vehicle or other tangible property is not covered under a manufacturer or dealer warranty then you will pay more in sales taxes.

This tax change means that two people can own similar tangible property, but one could potentially end up paying more in sales taxes simply because they don’t have a manufacturer or dealer warranty. This is troubling because it is likely to particularly harm low-income taxpayers who already pay a larger share of their income in taxes compared to the well-off. Low-income taxpayers who have to take their non-warranted vehicle to an auto shop for an unexpected repair will pay more in sales taxes, for example. Meanwhile, those who are able to afford costly warranties will escape having to pay more in sales taxes.

The backtracking on services included in the sales tax base expansion contradicts state lawmakers’ supposed commitment to base broadening on principle. Broadening the sales tax base has been sold as a way to make the state’s tax code more effective and ensure that it reflects a more service-oriented economy. That appears to be the case only if powerful lobbyists don’t object.

The result is that this proposed tax change could lower the expected additional revenue generated from expanding the sales tax base. This additional revenue is included in the budget passed by state lawmakers. The sales tax base expansion pays for a small portion of the next round of costly income tax cuts that were also included in the budget. Even with the sales tax base expansion, the income tax cuts drive the total annual revenue loss from the tax plan to nearly $1 billion by fiscal year 2018.

This last-minute carve-out also has implications for the budget passed on last Friday since policymakers must have the revenue to meet spending commitments. It is certainly true that state lawmakers could point to the $182.6 million in unappropriated revenue in the budget for this fiscal year as a way to cover the revenue hole. However, this unappropriated revenue is one-time dollars while the reduced revenue from the proposed tax change is permanent and recurring. This last-minute change also raises questions as to how the newly designed distribution formula that changes how sales tax revenue is allocated across local communities will be affected.

The narrow backtracking on the sales tax base expansion does not make the state’s upside-down tax code any better. State lawmakers failed to address this reality in the budget they passed and this failure continues with HB 117. Rather than addressing the tax shift, policymakers continue to build a tax code that fails to ensure the state can adequately fund the foundations of an economy that works for everyone.