Service tax idea gains legislative supporters

One recent afternoon, 40-year-old Jennifer Taylor came in with several inches of gray roots. But after a little while in the stylist’s chair, her long hair and bangs were a uniform dark red.

After nearly 10 months of looking for work, Taylor was getting ready for a job interview the next day.

“You have to look a certain way to apply for a job,” she said. To her, the $100 dye job wasn’t optional.

In Nevada’s ongoing battle over taxes, businesses such as Hypnotic could be the latest front. Though no formal proposal exists, legislative insiders say expanding the state’s sales tax to include services is emerging as a front-runner for plugging a $2.2 billion hole in the state budget.

A.J. Joshi has owned the Hypnotic salon on Sahara Avenue and Fort Apache Road for three years. His customers pay sales tax on some products he sells at the shop but not on the salon services that make up 90 percent of the business’s income. Joshi wants it to stay that way.

“Everything comes down to the consumer,” he said. “If they have to pay taxes to get a service done, they’re less likely to do it because it increases the cost.”

When money is tight, people cut back on salon services, for example, postponing color treatment appointments a week or month, he said.

Joshi’s business slowed last fall and earlier this year before picking up a little last month. Still, business then was down 25 percent from the previous March.

The last thing Joshi needs is another reason for customers to forgo getting their hair done, he said.

Proponents of a sales tax on services say it would merely expand the tax on retail goods that Nevadans already pay. Service includes things such as gym memberships, private detectives, lawyers and in-home care.

Even groups that are traditionally skeptical of taxes have supported the idea. During the 2003 tax battle, the Las Vegas Chamber of Commerce and other business groups proposed a 5 percent tax on some services as an alternative to the gross receipts tax proposal. Neither proposal passed.

The Nevada Taxpayers Association has also supported a limited tax on services.

Carole Vilardo, the group’s president, said she has frequently heard about the idea in the halls of the Legislature in Carson City, where she lobbies for her organization.

“Judging from the rumors, if you will, and questions I have been asked by lobbyists and legislators, it appears that’s picking up traction,” she said. “Do I know that’s what will be proposed, or what exactly is being contemplated? No.”

Others close to the legislative process echoed Vilardo’s assessment, though legislative leaders remain adamant that the discussion over what to tax must not begin until spending decisions are settled.

“We will have hearings and we will talk about the pros and cons of everything,” said Assembly Speaker Barbara Buckley, D-Las Vegas. “But it’s important to do this in a deliberative manner, and the first step is to have the discussion about where we are.”

Rumors of a services tax were enough to spur Republican gubernatorial candidate Mike Montandon, the North Las Vegas mayor, to launch a petition Thursday against the idea. Such a tax would force customers to cut spending, which would hurt small businesses, he said.

The same day Montandon launched the petition, legislators said they faced a $2.2 billion gap between the amount needed to fund current state service levels and the projected revenue over the next two years.

A services tax could help fill that gap.

A 2003 projection by the Las Vegas firm Applied Analysis estimated $64.4 billion in taxable sales of all services in 2009, compared to $46.2 billion in sales of retail goods. Despite the recent economic slump, proprietary estimates the firm is generating this year show similar numbers, said Applied Analysis principal Jeremy Aguero. Based on those figures, a 1 percent tax on all services could generate $644 million per year and $1.3 billion over the biennium.

The state’s current sales tax starts at 6.5 percent and varies by county. Clark County’s rate is 7.75 percent.

Services make up a growing portion of the American economy as manufacturing declines and more people can afford to have others do things for them. In 1947, 31 percent of the nation’s consumer spending was on services. By 2007 it was 60 percent.

That shift means retail sales taxes generate revenue from a narrower sector of the economy.

“Because you narrow the tax base by not taxing services, you have to charge a higher rate on goods,” said Josh Barro, a staff economist at the Tax Foundation, a nonpartisan think tank in Washington, D.C. “Also, a tax on goods may be more regressive because wealthier people generally purchase more services.”

A broader tax base is more fair and less likely to distort the economy by affecting consumers’ buying decisions, he said.

States feature a spectrum of approaches to taxing services, Barro said. On one end are states such as Nevada that tax very few services. Other states, such as Hawaii and New Mexico, tax almost every transaction.

The Progressive Leadership Alliance of Nevada, a liberal advocacy group, has called for a variety of new taxes to boost state spending, but a sales tax on services isn’t one of them because it is regressive, the group said.

The poor spend more of their income on basic necessities, so a tax on consumption means they put a greater proportion of their income into the economy than the rich.

PLAN wants those with more money to contribute more to the government, ideally through income taxes on individuals and businesses.

“Some services make a lot of money, and we think they ought to step up to the plate,” PLAN’s Launce Rake said. “We do not want to see working families hit with this. We do not want to hit small businesses when many of those folks are trying to scrape by. We want to hit the financial advisers, the consultants, the lobbyists — people who are making pretty good money.”

Denise Wilcox, a financial planner and investment adviser at the small Henderson firm Financial Solutions, said people shouldn’t assume all of her customers are rich. Most are middle- or upper-middle-income earners, from the very wealthy to teachers.

Wilcox said she would hate to see her customers pay more because of a services tax. Instead, she would try to absorb the added cost even if it meant cutting into the firm’s profits.

“I have a concern about any additional taxes on small business at this time,” she said. “Myself and all the other small business owners I know are not having an easy time.”

The tumbling markets have had an unsettling effect on the financial clientele as well as the firm’s income from investments.

However, Wilcox said she has seen an increase in customers as people worried about their financial situation look to plan for the future. She said she doesn’t think a modest tax would drive them away.

“We’ve always prided ourself here in Nevada that we don’t have a lot of the taxes that other states do,” she said. “People would be concerned, but I don’t think that would stop them from wanting to plan for the future. I get why the state is looking into all avenues. Education is at risk.”

Contact reporter Molly Ball at mball @reviewjournal.com or 702-387-2919.