To close a looming budget shortfall, some members of the Washington state Legislature have proposed increasing the state sales tax rate from 6.5 percent to 7.5 percent. If more revenues need to be raised from sales taxes, a better alternative would be to broaden the base of the sales tax as was recommended by the Tax Structure Study Committee in 2002.
Currently the sales tax applies primarily to purchases of tangible goods but exempts expenditures on many consumer services. Yet a substantial share of consumer spending is for tax-exempt services that in many cases are substitutes for taxable tangible goods. For example, DVD rentals are taxed but cable TV services are not. Such disparate treatment makes no economic sense, and the Tax Study Committee recommended extending the sales tax to consumer services.
Taxing consumer services would raise approximately as much revenue as a 0.3 percentage point increase in the state tax rate. It would also provide additional revenue to local governments dependent on local sales taxes. In contrast, an increase in the tax rate, by discouraging taxable sales within the state, will reduce local government revenue and discourage economic activity within the state.