advancing the cause of liberty takes more than just coming up with ideas it means making them happen this is society and the state life liberty and your pursuit of happiness now your hosts Connor Boykin Brian Hyde welcome everybody to society and the state this is episode 148 Connor here flying solo for this episode joined by jaredwall Zack who is the senior policy analyst at the Tax Foundation to talk about this this idea this trend perhaps or at least this effort in some states certainly in our own backyard here in Utah where we're at to talk about taxing not just goods but services as well Jared thanks for joining us it could do with you maybe let's take a step back and talk about the sales tax in general this wasn't around when America got started it wasn't even around the 1800s could you give us a little bit of historical context for why we are the way we are today what is the sales tax and kind of how did it come about the sales tax is most product of the Great Depression you go throughout history you will find taxes on certain types of sales more excise taxes as we think of them netbook but you get to the Great Depression and suddenly property taxes which is the most important tax for both state and local governments the bottom falls out property values have collapsed there's not much of them water income especially at the state level and they usually only hit the highest income people there's no revenue anymore but everyone consumes sure we can less during the Depression but everyone buys something it was a relatively quick and easy and simple way for governments to collect enough revenue to get through the Great Depression so states started adopting them but they did simplest way so often initially they were just on retail sales in some states they were just on dry goods now you go to the A&P and what you purchased there would subject to sales tax so that's interesting this is a bit of speculation but I want to get your reaction do you think we would have the sales tax if we didn't have the the boom and the bust and the depression go back in history depression never happened you know do you do you think that I mean was this it sounds like this was just reactive right he's like oh we got to figure something else out had that depression not happened it'd be interesting right to speculate what would that be like today you can imagine it looking very different there are a lot of economic reasons why consumption taxes can be a good way of raising revenue which of the world does have some sort of consumption tax but we're unique in the United States in focusing on a retail sales tax most of the rest of the world has value-added taxes they operate very differently partially this is because we had a state-led approach and many other countries are much more centralized so it's easy for the national government to impose this on everyone and we developed it state-by-state the part of it too is that ours came of expediency we just in the early 1930s had states looking for revenue and this was the e thing to do they were looking for pennies in the cushion yeah I'm looking at a map here at all when the different states came on board you know California in 1933 same with Oklahoma Utah New Mexico 1935 there were a bunch 1937 some states were holdouts it looks like so not till the 1960s did Idaho and Nebraska and Texas and Minnesota come on board so as you point out this was very much kind of a state-led effort give us a little snapshot Jared if you would that you know back in the 30s or I guess through the 60s when more states came on board the the economy was different than it was today so what did the sales tax look like then versus how it's starting to be changed with today's economy being structured a bit differently sure the theoretical purpose of a sales tax is to capture all final consumption everything that a consumer is using the challenge of course is that some of that in order to capture than others and we have this historical accident because the sales is a child of the depression and really a child of the deep south in the depression these first sales tax in the United States in the modern sense within 1930 in Mississippi and other southern states adopted it after that and most of the states then modeled after them they adopted basically the same language tweaked a little for their states but at that point we're at two-thirds dues based economy more so we're not purchasing a whole lot of personal services and it was also a time when states did have nearly the administrative capacity as they have now and taxpayers weren't used to having to comply with a lot of taxes so it was relatively easy to say we're just going to hit retail sales you go to a gross per you go to a handful of major sellers sales tax but we're not going to worry about everything else because there's not that much of it but that's not who we are now two-thirds of our consumption as individuals is now services partly this is because we're wealthier as you get wealth so many goods you can accumulate but you buy more and more services partly it's because we change what sort of consumption we have I think a lot of younger people in particular talk about buying experiences which tends to be service based who even transform goods where you used to buy a record or a tape or a CD you buy a streaming service where you used to buy a physical book you buy a book where you used to buy a software suite that came this gets or a CD now you subscribe to some sort of online software service so you've gone from tangible property that's taxable to this service property this service good isn't taxable and really we're consuming roughly the same things but we've reclassified them and they're no longer subject to tax which from an individual perspective is the beneficial thing right you're evading that tax burden that wasn't that you once had but what we're seeing then is the especially the local governments but certainly the states as well noticing that decline in overall revenue relative to people leaving the the goods based economy and entering the service based economy more and more and so talk about that pressure I mean that we saw it here in my state in Utah very recently there's been a whole lot of agitation for starting to tax services talk about it from the public policy perspective the average person's city leaders or state leaders why are they feeling that pinch and why are they wanting to expand the tax from a governmental perspective you stable and predict so when you have this erosion year over year where you have a narrower base of things or something to tax that is concerning for you now some taxpayers perspective the first glance of this might be oh this is great I'm paying less sales tax the government's are still growing they're collecting tax so it's a question of what if you have this base erosion even the sales tax rate has to go higher to collect the same amount of revenue or you need to rely more on other taxes economists don't like this because we think that sales taxes tend to be more economically neutral they are simply better for economic growth than income taxes or other forms of taxes so if the sales tax is getting smaller and another type of getting bigger that's probably bad more broadly if we're taxing some types of purchases and the others we're picking winners and losers kind of arbitrarily we're deciding what is subject to tax the other trend you see if you look at all of the major taxes and particularly look at the income and the sales tax income tax rates have been coming down in recent decades sales tax rates are going up and they're mainly going up just to collect the same amount of revenue so what we're saying is we're going to have twice the rate we've otherwise would have on the things they're still subject to the tax so we can keep the tax off the other categories the idea of broad-based and low rates makes a lot of sense we shouldn't be distinguishing between these purchases it's an interesting point you raised that I want to call a bit of attention to you said picking winners and losers what I have found is some of the most vocal people who oppose expanding the sales tax to services are also the quickest to use this this argument that the government shouldn't be in the business of picking winners and losers let me offer an example that I've shared with people that so far these individuals haven't been able to you know really refute or robot even if they they don't like it and the example I share is let's you know go back a hundred years and imagine that because white people controlled the government they exempted themselves from real property taxes their land and they said you know what we're just going to have ethnic minorities footing the bill on this one stupid public policy but let's imagine in our fictitious example that's the way it worked so that's the way it's been for a hundred years and white people have been used to buying and owning land at cheaper rates just because they don't have the tax burden and that's the system that we live in along comes you know a group like yours or mine or whoever that says you know what we should probably just have it be fair across the board and regardless of your skin color everyone should be paying you know real property taxes so we lower the the rate we spread the burden broaden the base and that's what's most fair of course in this example this fictitious example you would have all sorts of white people or white supremacy organizations or whatever coming forward to say well wait a minute no we shouldn't have that that's not fair and and you know the beneficiaries of that that picking winners and losers previously in this example the whites would of course be the most vocal in trying to lobby against it because they've been the direct beneficiaries of that policy for so long my feeling in Jared I would like your response to this is that that's the system that we have in the real world today not with skin color but with the type of product the public policy said you know it if you deal with tangible goods then you are going to have be subject to the tax we're going to compel you to collect and remit the tax on behalf of the state and those who purchase your your goods will have to pay for that whereas hey if you're in the services business you don't have to do with any of that we're not going to deputize you as a tax collector your customers don't have to pay for it and you do get this kind of picking winners and losers so obviously when the idea comes along to say hey let's broaden the base lower the rate have it apply to both goods and services you have the people in the services industry who are very loudly objecting because they've never had to do that is there anything wrong with my example or do you see that being a somewhat fair description of the the environment that we're in today well I think your example involves maybe a lot more malice as a more malignant excellent and of course what actually happened here is much more accidental but it's certainly true that there's not an economic justification for these distinctions if you were starting scratch right now I don't think anyone would come up with the system we have but if you have been winner for a very long time it's absolutely in your vested interest to try to preserve that and we see this in all aspects of policy and certainly all areas of taxation from the perspective of the taxpayer this makes very little sense we are favoring some sort of industries over others we're favoring very similar products over others we go back to the example of digital goods or digital services it's basically the same thing if I buy online music streaming versus buying a CD it's really the same thing from my perspective I'm listening to music and yet the state treats them differently and we see this in so many different categories and over time it does put a ton of pressure on the rates we see those go up it changes consumption patterns when the rates have to be high you see cross-border shopping and other that you wouldn't see otherwise pushes income taxes up the taxpayer shouldn't want this it should be no surprised that those who have gone untaxed for a long time will have a vested interest in trying to keep it that way but we shouldn't see that as good policy to enable that and I think sometimes yeah especially coming at this from the rope do you hear like we're creating a new tax we're taxing these things that are untaxed I don't see it that way the sales tax is a consumption tax it's intended to tax all final consumption anything that an end user consumer actually purchases it some users should be taxed and we have exemptions and we should be looking at having that broadest possible so that we can get you what the tax is supposed to be and then have a lower rate I do want to distinguish their final consumption is really important if you tax intermediate transactions you want to call them that you're gonna have pyramiding it's not a question of should we tax business versus tax individuals we're taxing confucian and ultimately we consume everything the question is should the same good or service be taxed multiple times as is produced if I buy a good you tax the raw materials and then you tax the packaging and then you tax the shipping and then you tax it when I buy it at the register that good has multiple layers of tax in it and that's not good if we taxed one time and the same applies to services so we need to be careful we're talking about services what we mean by that but it's a service is actually being consumed by an answer it should be treated the exact same way as when a tangible good is consumed by an end-user Jered one of your colleagues wrote an article about a year and a half ago called sales tax base broadening right-sizing estate sales tax for our listeners this is actually a very interesting article I'm going to link to it on the show notes page society in the state comm slash 148 and in it there's all sorts of different factoids and figures and so forth but there's this this statement that you know states have experimented with broadening their sales taxes but most efforts have been piecemeal and I'm gonna also link to another article I found which has a map and has these color-coded dots showing which states are taxing which services and there's this idea I think that it's not happening but as your colleague points out it has happened piecemeal and there are a number of states that are taxing different types of services some are for example services to real property like improvements to buildings into land like landscaping lawn service there are some the tax services to let's say tangible personal property like carpentry services or a car repair business services also some states are currently taxing that like telephone answering services or a credit reporting agency so kind of interesting to look state-by-state and see who's doing what so Jerrod my question for you is as the Tax Foundation is you guys are advocating for broadening the base and lowering the rate do you foresee opportunities to kind of have this like you pointed out a moment ago Jerrod that if anyone can have the opportunity to set up the tax system right now no one would envision the status quo is kind of what they would do so imagine you know you guys are trying to advocate in different states including Utah like hey we just need to broadly broaden the base and lower the rate rather than this piecemeal approach is that really a feasible thing given as you point out the vested interests than the lobbying that's gonna push back or are we more likely to see this kind of piecemeal approach where states are adding one business sector or one category at a time do you do you really see us getting to a point where we have more fairness and equity across the board rather than this piecemeal approach I think we're going to get there it takes time and I don't just mean that we'll do a piecemeal but also you need the dam to break you need a couple of states to take a bolder approach and then I think you will see a lot of states follow them as you've seen us in other taxes where it takes a long time for something to get customs but once it does states tend to copy the sales tax itself is an example of this you go much of American history and you don't have these or at least not for long periods of time and once they get established they catch on states need to do something take the Utah example if you go back to right after World War 2 about 80 percent of personal consumption is subject to the sales tax you look right now 38 percent of personal consumption is subject to the sales tax it has been halved over that period because of changes in consumption patterns the tax no longer looks like other ones did we've changed we consume services now we need to reflect that in the sales tax and states have been taking this piecemeal approach because it's tough to be bold it's tough to change the tax substantially but they all know it's a problem I think that it just takes a state to lead on this and unfortunately in the 1990s a couple of states looked at this and went about it the wrong way Florida did it and it was basically all business inputs they would have pyramid terribly where you had multiple layers of taxation and quickly everyone realized this is going to be a disaster and before it could even be implemented repealed it that was the right choice but unfortunately I think the lesson a lot of states learned was you get your hand burned you do you how to do this yeah I don't think that's right but it takes time if a state like Utah is able to go forward with this and show that everyone now has some skin in the game but we have a more equitable more stable more pro-growth tax code I think a lot of states well very interesting stuff will be very obviously watching closely here in our own backyard before our listeners make sure you're checking out Society in the state comm slash 148 we'll post a couple these articles very interesting to see what is currently happening in your backyard and then also be on the watch for what's going to happen jaredwall zach is a senior policy analyst at the Tax Foundation very interesting stuff Jared thanks for joining us today well thanks for having me you've been listening to society and the state for shownotes archives and great content visit society and the state calm you