Maine’s sales tax could be modernized to yield more revenue and make the sales tax fairer. Maine taxes very few services under its sales tax; the sales tax is largely levied on purchases of tangible goods. Yet production and consumption have been shifting in the U.S. economy — and in Maine’s economy — from goods to services over the past four decades.
Of all sales made in Maine, 51.3 percent were subject to sales tax in 1990. By 2003, that percentage had dropped to 45.6 percent, a decline of 5.7 percentage points in just over a decade.[1] In significant part, this occurred because most services are exempt under Maine’s sales tax.
The Federation of Tax Administrators catalogs 168 services that states could include in their sales tax. Of the 168 services, Maine taxes only 24.
By contrast, Connecticut taxes 80 of the services cataloged by the Federation of Tax Administrators — or about half of the services provided in the economy that could potentially be taxed. For example, Connecticut taxes fees for health clubs, photographic services, landscaping services, public relations services, private investigations services, auto repair services, and types of leases and rentals that Maine does not tax. (See box at top of page 2.)
If Maine added the services taxed by Connecticut to its own sales tax, sales tax collections in Maine would increase by approximately $120 million a year.[2]
Of course, Maine policymakers may wish to make somewhat different choices of which services to tax than Connecticut did. This analysis was undertaken to suggest the magnitude of the difference that taxing a modest number of additional services could make.
Increasing the number of services taxed under the sales tax has other benefits, in addition to enhancing revenues.
Reducing Volatility: Maine’s sales tax base is dominated by purchases of “big ticket” durable goods such as cars, boats and snowmobiles, appliances, and furniture. Such purchases often decline sharply during economic downturns; the timing of such purchases often is discretionary, and people may be reluctant to make large purchases in an uncertain economy even if they personally have not lost employment or income.
Expanding the base to include more services could modestly moderate the volatility of sales tax revenues over the course of the business cycle. For example, if people are not buying new vehicles they probably are having their older vehicles repaired more frequently; taxing repair services can offset in part the drop in sales tax revenue from flagging vehicle purchases. In addition, many other services such as computer services or janitorial services to non-residential buildings are likely to continue in significant part through an economic downturn.
- All leases and rentals
- Computer/data processing services
- Employment agencies
- Private investigation and protection
- Painting and lettering
- Advertising, graphic design
- Telephone answering
- Management consulting, public relations
- Repairs (appliances, auto, furniture, etc.)
- Landscaping
- Janitorial
- Photo studios
- Health clubs
Improving Fairness: Since the sales tax is intended to be a general tax on consumption, there is little reason to tax the consumption of goods and not tax the consumption of services, which can be substitutes for one another. For example, it is not equitable to tax the person who buys a lawnmower but not the person who hires a lawn care service.
Improving Allocation of Economic Resources: Taxing most goods but not most services can to some degree distort resource allocation throughout the economy by creating an artificial incentive to purchase services rather than goods. Increasing the number of services taxed can improve this situation.