State Tax Hikes Are a Zero Sum Game

The New York Times reports that more and more states are eyeing sales taxes on services as a means to bring in more tax revenue. Currently, most states exempt services from sales tax.

The article makes a fair historical point about how the US economy has changed since the time that the sales tax was originally introduced long ago.

"In the 1930s, with property tax revenues shrinking because of the Great Depression, states began taxing the sales of items. It was simple, and at the time, the tax matched an economy largely based on goods.

But as the nation's economy shifted to one focused more on services, the tax system mostly did not budge. And so, in 2009, states raised $230 billion in sales taxes; had they taxed all services, too, according to Joseph Henchman of the Tax Foundation, a nonpartisan research group, they might have raised twice that."

The dubious point being made in the article is that by taxing services, states would be able to generate a whole lot more tax revenue, much more than they're able to bring in by only taxing sales of goods.

The reality however is that household finances can not bear much more in costs, particularly in new taxes. With personal bankruptcies peaking, with mortgage resets looming, the idea that there is a vast untapped pool of capital out there for state governments to absorb in the form of new taxes ludicrous.

Taxpayers that must pay new taxes imposed on services will then have less money to spend on other goods and services, putting even more pressure on local businesses and the amount of income tax they pay.

Tax hikes at the state level are increasingly becoming a zero-sum game, in that increased taxes on one part of the economy will be matched by reduced tax revenues from other parts.