Lawmakers look at adding taxes to 130 more services

jfrank@newsobserver.comMarch 19, 2013 

  • Services that could be taxed

    The state now taxes about 30 services. It is considering adding about 130 more.

    Among those that could be added:

    • Pet grooming • Landscaping, including lawn care • Carpentry, painting, plumbing and other trades • Intra-city buses • Barber shops and beauty salons • Diaper services • Health clubs • Shoe repair • Internet service providers • Books, music and movie downloads from the Internet

— The Emporium Plaza and its patchwork of shops is not unlike any other strip mall along Capital Boulevard. There’s a barber shop, an urgent care clinic, a spa and pool retailer, and even a Chuck E. Cheese.

But they are connected in the minds of some Republican lawmakers five miles south at the statehouse: All offer services exempt from the state sales tax.

To lower the state’s income taxes, top legislative leaders are discussing a plan to levy a sales tax on those businesses and roughly 130 more that offer tax-free services – everything from haircuts and insurance to pool cleaning and arcade games.

Mal-Selika Perry, who owns a beauty salon within the barber shop, thinks she knows exactly where the customers will find the extra money. “There goes my tip,” she said.

For small businesses like hers, and a half-dozen others in Emporium Plaza, Perry said the sales tax will lead to higher prices and fewer services sold. “I have people complain about the $1.50 charge to swipe their credit card,” she said. “I can just imagine the complaints about the tax.”

Down the sidewalk at Backyard Leisure, co-owner Alan Mosher sells and installs hot tubs and pools. Labor is currently tax-free, and Mosher can’t swallow the extra cost of a sales tax. “The price of the tub is just going to have to go up,” he said without hesitation.

Secret discussions

Republicans made an overhaul of the state’s tax system a top issue this legislative session, but the dialogue remains behind closed doors as the House and Senate work to craft a consensus plan before introducing legislation. The secrecy is a point of objection among the Democrats in the minority.

So far, much of the attention is focused on Senate leaders’ goal to eliminate all income taxes and less on how to pay for the cuts – even though the repercussions from the a sales tax on services is sweeping.

North Carolina lawmakers are considering putting a sales tax on any service that is taxed in at least one other state. The list of nearly 170 types of services is based on a 2007 survey from the Federation of Tax Administrators, an industry professional group.

It includes car washes, landscaping, water, debt counseling, dating services, taxidermy, newspapers, bowling alleys, most labor costs, pet grooming, investment counseling, and professional services offered by attorneys, accountants, veterinarians and physicians.

A recent study estimated the broader tax on services would collect about $2.1 billion in additional revenue for the state at the current rate, a small part of what is needed to offset the approximately $12 billion generated by the corporate and personal income taxes. Lawmakers are also considering increase the sales tax, so that number could increase.

States’ sales-tax rates

North Carolina currently taxes about 30 services, according to the survey, fewer than all but 18 states. But not all are taxed at the current 4.75 percent state sales tax rate.

Only two states – Hawaii and New Mexico – tax most of the services tracked by the group, while only seven states tax professional services.

A handful of services on the list are taxed in a few states and seem outmoded for North Carolina, such as tickertape financial reporting and seismograph services.

Republican lawmakers acknowledge that a services sales tax may increase what consumers pay, but they argue that income tax cuts being considered will soften the blow to their wallets and create a system that is more sustainable and fair.

Sen. Bob Rucho, a Republican leading the tax overhaul efforts, said revamping the system is necessary because household consumption has changed, eroding the base of the state’s tax system. Two-thirds of household purchases are services and one-third are taxed tangible goods, the opposite of a generation ago, he said.

“We are competing in a 2013 global economy, and our tax policy is from the 1930s,” he said. “That’s like trying to drive on a super highway in a Model T.”

Rucho said he favors taxing all services on the list. “It should be a balanced approach because there is more and more of a shift toward the service industry in North Carolina … and it’s just a matter of fairness that everybody should be treated the same,” he said.

Rep. David Lewis, a Republican leading the effort in the House, said he expects his colleagues to debut their own outline for a tax overhaul before the end of the month – amplifying the negotiation efforts with Senate leaders, who put forth a conceptual plan earlier this year.

“We are looking at broadening the base and trying to figure out what will spur additional economic growth and employment in the state,” he said.

From the sidelines, Democrats argue the Republicans’ initial ideas would shift the tax burden disproportionately and hurt lower-income taxpayers, who spend a larger share of their money on services.

“It’s unfair to the majority of people if income taxes are lowered and sales taxes go up,” said Rep. Paul Luebke, a Durham Democrat. “The wealthy will disproportionally benefit from the decrease.”

Bad timing

This is the concern for Kentrell Perry, a stylist at the Locks, Nails and More salon in the Emporium Plaza barber shop. He talked Tuesday as he styled a customer’s hair and did math in his head about the extra costs, adding it up over the course of a year.

He said he isn’t making much to start and his customers don’t have much extra money to spend.

“It’s the wrong time for it,” he concluded. “We’re still in the midst of the recession.”

At the other end of the shopping plaza, Mosher noted the extra costs to his business if sales tax applies to the charge for his Internet service provider or accountant. He said his corporate tax is pretty low and may not offset the increased sales taxes.

But Mosher, who wants to see income taxes eliminated, came to a different conclusion about the timing, saying it’s the right moment for a tax overhaul.

“I don’t mind paying more,” he said, “and I don’t think a lot of people do as long as we see (lawmakers) are going to cut (other taxes) and spend appropriately.”

Frank: 919-829-4698

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