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States hike sales tax to add to revenue


As state governments struggled in recent years with the recession’s impact on revenues, a number of them—including two Virginia neighbors—increased their sales tax rates to help increase revenue.

The Tax Foundation, a nonpartisan group that studies tax policy, considers it a trend, and not necessarily one that’s going away soon.

In a new analysis, the Tax Foundation says 13 states raised their sales tax—at least temporarily—since 2007.

Arizona, California and Nevada set temporary increases; North Carolina, Maryland, D.C., Connecticut, Indiana, Iowa, Kansas, Massachusetts, Minnesota, New Mexico, and Utah didn’t put expiration dates on their increases.

In Maryland, the sales tax rate has gone from 5 percent to 6 percent; in D.C. it went from 5.75 percent to 6 percent; and in North Carolina, it moved in several increments from 4.25 percent, settling at 4.75 percent.

Virginia has not increased its sales tax rate, although it—among other states—has pursued gathering sales tax from online sales. Earlier this year, online retailer Amazon agreed to start collecting and remitting sales taxes from Virginians’ online purchases, a move that will take effect next year.

Virginia is also seeing a slight rebound in revenues; earlier this week, Gov. Bob McDonnell announced that tax revenues for May grew 8.3 percent. For the fiscal year so far, revenues have grown 6.2 percent through May, which is above the forecast growth of 4.5 percent growth.

According to the Tax Foundation, states have seen the base of their sales tax revenues shrink—not just in the recession, but since sales taxes became popular after the Great Depression.

One reason is that most states—including Virginia—don’t tax services, and the service sector has become a much greater part of the economy than it was years ago.

A state study done last year indicated that Virginia could increase revenues by $3.5 billion by applying the sales tax to services. Another study released in April by the Thomas Jefferson Institute for Public Policy showed that Virginia could reduce tax rates and still generate more revenue by broadening its tax base and reducing the number of tax exemptions it offers.

That could be politically difficult, however, a fact also mentioned by the Tax Foundation in this week’s study.

The Tax Foundation noted a couple of instances where states’ efforts to tax services failed because they included exemptions. In Maryland, the Foundation said, a 2007 attempt to expand the sales tax to services failed when it exempted politically powerful services like accounting, legal and medical services. When other service industries lobbied for exclusion as well, not much was left.

The Foundation advised states to avoid playing favorites with exemptions when considering taxing services.

“The key weakness in these failures has been exempting certain ‘untouchable’ goods and services, which strengthens the resolve of others to bring their good or service under the exemption umbrella,” the report said. “A proposal to tax all final retail sales, with no exceptions whatsoever, in conjunction with a deep tax rate cut, may be more politically sellable than the half-measure approaches that have not worked.”

Chelyen Davis: 540/368-5028