Sales taxes have become more of a major public policy controversy at the national, state, and local levels of government as the debate over tax treatment of the Internet escalates. This controversy has at least two dimensions. First, the out-of-state sales issues extends beyond Internet sales to not only catalog sales, but also those goods sold through television advertisements, paid programs, and home shopping channels. Second, there remains the serious issue as to whether sales taxes should also be applied to services as well. This latter issue arises from the economic maxim that a tax should be as broad-based as possible so as to lower the rate and minimize the price distortions. It also raises the question of fairness in a similar manner as the debate over Internet sales versus "Main Street" sales -- why should sales of some businesses be subject to taxes while others are not? For example, sales taxes in Oklahoma typically go into a general fund to finance a range of public services. All businesses benefit from the provision of public services and public infrastructure, not just retail stores. In addition, since it is not the business that pays the sales tax but rather the consumer, objections from service businesses to a sales tax tend to focus on the difficulty and cost of collection rather than the impact on sales of its services. In fact, an argument can be made that taxes on services actually has less impact on the level of sales because consumers cannot easily go to another state or even country for services, while they can do so for goods.

Another equity or fairness argument enters through the taxpayer. Since the poor can generally be expected to spend a larger share of their budget on goods and less on services than the rich, broadening the tax base would reduce the regressivity of the sales tax. This would be particularly true if it permits the tax rate to be reduced.

Some background information may help at this point to put Oklahoma in perspective. State and local sales taxes can be levied on food and non-prescription drugs but not on prescription drugs. Currently, there are 27 states that exempt food from sales taxes and 9 states that exempt non-prescription drugs from sales taxes. There are 43 states that, like Oklahoma, exempt prescription drugs. Thirty-one states exempt consumer electric and gas utilities. More than half of the states tax services such as household, automobile, and appliance repairs, barber and beauty shops, printing, rentals, dry cleaning, and interior decorating. However, only three states tax all personal and professional services; in general, professional services such as legal and financial services are exempted by most states. Bowman and Kearney predict that many personal and professional services are "likely to lose their tax-favored status in years to come, as states extend sales taxes to services incrementally, fighting industry and lobbyists one at a time.

In its region, Oklahoma applies sales taxes to a very small number of services compared to neighboring states. Oklahoma law currently allows taxation of 32 different types of services, primarily utilities and admissions/amusements. In comparison, Texas and Kansas tax approximately 80 different types of services.

The Oklahoma Municipal League estimated that $90 million in revenues could have been generated in 1996 municipal sales taxes by extending the range of taxable services to include personal services, business services, auto repair services, and miscellaneous repair services. At the state level, broadening the range of taxable services to include such areas as finance, insurance, and real estate, and personal, business, business, and computer services could generate as much as $100 million more in sales tax revenues if Oklahoma taxed the same categories of services as Texas.

One proposal that occasionally surfaces within public policy circles is to swap Oklahoma’s sales tax on groceries for sales taxes on an expanded list of services. According to the Oklahoma Municipal League, grocery sales generated an estimated $98 million in sales tax revenues for Oklahoma municipalities in the fiscal year 1996-97. At the state level, sales taxes on groceries are projected to produce approximately $178 million in fiscal year 2000.

While it is difficult at this point to compare exactly which services that municipalities and the state have used in their estimates, it does seem evident that sales taxes on an expanded range of services could potentially offset revenues from sales taxes on groceries. Economists and political scientists agree that sales taxes on food and clothing are clearly regressive, and thus such taxes place a heavier relative tax burden on lower-income people. However, it should also be noted that a sales tax on some services not currently taxed, such as personal services and repair services, would also affect low-income persons and thus the regressive nature of sales taxes on food would not be completely offset.

DETAILED SUMMARY OF SURVEY RESULTS

Respondents were asked to rank the alternatives A, B, and C from first to third most desirable for each of the following criteria, as well as for their overall merit based on all four criteria. If two alternatives were considered essentially identical, they may have been ranked both as first, second or third.   

The results are reported here for each tax base as percent ranking  either first, second, or third.   

Consider the following three alternative tax bases:

1. Current sales tax base and tax rate
   

   Criteria	% Ranking Tax Base A....
   	1st	2nd	3rd
   Tax Efficiency	13	10	77
   Tax Equity	3	20	77
   Minimizing Associated Costs	54	21	25
   Stable Long Run Tax Revenues	3	20	77
   Overall	7	19	74

    

2. Essentially all goods and services (except groceries and prescription drugs), with the tax   rate adjusted downward in order to maintain the current tax revenues.
   

   Criteria	% Ranking Tax Base B....
   	1st	2nd	3rd
   Tax Efficiency	7	80	13
   Tax Equity	67	30	3
   Minimizing Associated Costs	11	61	29
   Stable Long Run Tax Revenues	20	67	13
   Overall	63	30	7

    

3. Essentially all goods and services, with the tax rate adjusted downward in order to maintain the current tax revenues.
   

   Criteria	% Ranking Tax Base C....
   	1st	2nd	3rd
   Tax Efficiency	80	10	10
   Tax Equity	Stable Long Run Tax Revenues	80	13	7
   Overall	30	48	22