Taxing Services Is a Confused, Back-Door Income Tax
The confusing set of tax changes proposed by Minnesota Governor Jesse Ventura has the same flaws inherent in all complex tax schemes: unintended consequences and unforeseen inequities.
by Jerome F. Winzig
In his 2001 State of the State message, Minnesota Governor Jesse Ventura has proposed a complicated and confusing set of tax changes that would, among other things, extend the state sales tax to a wide range of services. Under his proposal, sales taxes would be collected for such services as funerals, piano tuning, sewer, motor-vehicle repair, real-estate commissions, car washes, computer and data processing, construction, accounting, research, legal, and engineering.
In return, there would be some reductions in state income taxes, the state would take over a larger share of the costs of education, and the sales tax rate would be lowered from 6.5 percent to 6 percent.
The plan, however, suffers from the same flaws that plague all complex targeted tax schemes: unintended consequences and unforeseen inequities. For years, those who believe that government knows best have been trying to use the tax code to coerce and manipulate taxpayers into certain desired behaviors. What really happens, though, is that people make choices they would never make if it were not for the tax code, some people discover creative ways to reduce their taxes, and the number of accountants and tax attorneys continues to increase.
Ventura's new tax scheme is no exception. Take, for example, the sales tax rate. The state's sales tax rate is 6.5 percent. But certain municipalities, including Minneapolis and St. Paul, have an additional local sales tax. Thus, under the governor's proposal, funerals, car repairs, attorneys, and a host of other services will now cost more in Minneapolis and St. Paul than in their suburbs.
The governor proposes exempting farmland and cabins from certain local sales taxes. That's an encouragement to get people who own hobby farms to get their property classified as "farmland." Furthermore, owners of luxury lakehomes will have an incentive to set up apartments as their legal residences, thereby lowering the taxes on their principal dwellings.
By taxing most services, the governor's proposal levies a 6 to 6.5 percent tax on the gross income of almost everyone who is self-employed, including this writer. That does several things, none of them good or sensible. First, it makes self-employed individuals into tax collectors. Second, it increases their administrative costs by requiring them to complete additional tax forms. Third, it puts them in the unenviable position of either increasing the total price for their services or reducing their gross income by paying the tax out of their own pockets.
The governor also proposes several additional tax code complications. He wants to increase the Working Family Credit in unspecified ways. He suggests we exempt businesses from certain property taxes. He wants to lower the motor vehicle registration tax, a favorite target of his.
The governor seems to be totally unaware that complex tax schemes are inherently bad. It causes legislators and government bureaucrats to make silly choices as they decide what to tax and what not to tax. For example, should the services of the clergy be taxed? Should the services of therapists be taxed but not those of doctors and nurses?
When taxes are too complicated, it's almost impossible to predict their true consequences as people try to reduce their tax burden. Furthermore, when legislatures consider complicated tax schemes, they inevitably increase the number of lobbyists as people try to avoid additional taxes.
The unfortunate reality is that our tax code is already far too complicated. The governor's proposal ignores this obvious fact and attempts to make the tax code even worse. If Ventura were really interested in "a better tax system," he would consider a flat tax that would tax everyone at the same rate, without special exemptions, complex rules, convoluted exceptions, or tax breaks.