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Goods Versus Services: Economist Alan Viard’s Important Call for Sales Tax Neutrality

In this article, first published in State Tax Notes in 2011, Alan Viard, a serious scholar of tax policy, argues for the important tax policy principle of neutrality between consumer purchases of goods and services.  This article is required reading for any serious student of state tax policy.

Here are some highlights of Viard’s economic analysis of state sales taxes:

The sales tax exemption for consumer services has drawn scathing criticism from tax policy experts, who have uniformly condemned it as a source of economic inefficiency, complexity, and other problems.  The near unanimity on this issue resembles the consensus, documented in my article last June, condemning sales taxation of business purchases. Although it is both unnecessary and impractical to list all of the voices on this issue, I cite a few sources.

Hellerstein, Stark, Swain, and Youngman said:

Whatever the historical explanation for the limitation of the sales tax to sales of tangible personal property, it certainly does not lie in the dictates of sound fiscal or economic policy.  Indeed, tax economists long have deplored the exclusion of consumer services other than health and, in some cases, utility services from state taxation…

The most glaring flaw of the exemption of consumer services is that it causes resources to be inefficiently allocated, with too many resources allocated to consumer services and too few to consumer goods…

The economic case for neutral taxation of services is equally compelling, whether the economy is weak or strong…

Efficiency and simplicity both call for the transformation of state and local sales taxes into broad-based consumption taxes, with neutral treatment of the consumption of goods and the consumption of services.