Louisiana consumers are paying the highest sales tax rate in America, according to the latest data released by the Tax Foundation, almost a half-cent more than the next-highest state. And now, Governor John Bel Edwards plans to heap more taxes on Louisiana residents, this time adding a tax to the services we purchase.
Edwards has proposed the expansion of sales taxes to services, which may include everything from legal advice to landscaping-things we don’t pay sales tax on now, but the Governor thinks we should. Essentially, a tax on services is a direct tax on labor, not products. Sales taxes have always been applied to the end product of labor, not to the labor itself. In our state, where unemployment exceeds the national average1, a tax that would put a penalty on labor seems unwise. Economists argue that service taxes are bad for economic growth and lead to job losses.2 Gov. Edwards projects this new tax will raise $200 million in revenue, but at what cost?3
This tax will end up hurting the state’s business (especially small businesses) and consumers (mostly middle and low-income consumers), while putting all Louisiana businesses at a disadvantage against out-of-state competitors.
A service tax hurts small businesses disproportionately on both ends of the buying and selling spectrum. Small businesses are taxed on services purchased that large companies can provide in-house. On the flip side, small businesses lose business if a customer chooses to move the services in-house, use an out-of-state competitor or stop using the services altogether.4
Taxing a specific service encourages consumers to purchase the service from providers outside of the state, creating a competitive disadvantage for Louisiana businesses. The more expensive the service, the more in taxes it would cost the consumer which, in turn, will create a stronger incentive to move the business out of state.5
For consumers, a service tax makes the purchase of services more costly, disproportionately affecting middle and low-income consumers. If you have the money, rather than pay for repair services, you will probably replace a product and not bother with repairs. But for middle to low income consumers, replacing is not always an option, forcing these consumers to pay for repairs services and costing those who can’t afford it even more.
Service providers, like your car mechanic, don’t care if you’re rich or poor. They simply charge based on the service provided and the cost of labor needed. The customer is stuck paying the additional service sales tax. This tax is likely to hit the technology sector hard, creating a “perverse incentive” where good paying high-tech jobs, which can be performed remotely, are likely to be purchased out-of-state, putting Louisiana vendors at a disadvantage.6
Another negative side effect of a service tax is the “pyramid” effect that passes the costs of services to consumers. Your plumber pays a service tax to a company to create a website for him. Naturally he’ll add this new cost to the cost of doing business. When he fixes the leaky pipe at your house, you’ll pay the service tax on his services AND the built in tax he paid the web designer, effectively doubling the service tax rate and building an ever increasing pyramid of taxes.7
46 states operate without a tax on services.
There’s a reason why only four states broadly tax most services.8 Service taxes are the “wolf in sheep’s clothing” of taxes, innocent and unassuming at first glance, but detrimental and dangerous to small businesses and expensive for consumers.