Personal services may face 1st-time tax

Services are excluded from Georgia’s 4 percent sales tax. But a special council convened to rewrite the state’s tax code has called for the state to move away from income taxes and toward consumption taxes. As part of that move, the council recommended that about 50 personal services be taxed for the first time, including haircuts, country club and health club membership fees, shoe repair, veterinary services, lawn care and watch repair.

The problem, as members of the Special Council on Tax Reform and Fairness see it, is that services have become a larger portion of the state economy over the years. That shift means more of the tax burden is placed on businesses that sell goods, and the tax council concluded that is not fair.

It also does not provide a broad enough revenue base for the state, the council concluded in its January report. The state collected nearly $1 billion less in sales taxes in fiscal 2010 than it did four years earlier.

“Not taxing many services means that the tax base has become increasingly narrow, requiring a higher tax rate to obtain the same revenue, and providing an incentive to purchase services rather than tangible property," the council concluded.

David Sjoquist, a Georgia State University economist and tax council member, said the council weighed a number of factors in deciding which services should be taxed.

The council did not want to tax businesses that could leave the state to escape paying them. Most consumer services have to be where the consumers are, as with pest control, he said.

"You can’t really export that,” he said.

Ditto for things like garbage pickup, septic tank cleaning and dry cleaning fees, all of which are on a list of proposed services to be taxed.

The cost to consumers would not be insignificant. If the proposal is adopted as part of an overall approach to tax reform, the addition of a 4 percent sales tax on services is expected to generate $298 million in new revenue for the state. Local governments would add another 3 percent, or 4 percent for the city of Atlanta.

The council said the increase in state sales taxes would be offset by cutting income tax rates by a third over the next three years. But some are skeptical, including Guthrie.

“Just like they were taking the toll off Ga. 400?” she said. “Once it gets set, it doesn’t go away, man.”

Sjoquist said the council is aware the idea is not universally popular, and he acknowledges that collecting taxes on services like haircuts will not be easy.

“A lot of those people are set up as independent contractors and are just leasing the chair,” he said. “You are dealing with lots and lots of small businesses, which is a potential administrative problem, but other states do it.”

The proposal would require a lot of small businesses to start collecting taxes and turning them over the state, meaning new forms and filings for small-time outfits like independent lawn cutters or plumbers. Sjoquist concedes that the new taxes could make tax cheats out of some of these businesses if they did not collect the tax.

“With any very small business there is always that problem," he said.

Some smaller operators who rely on licenses from the state could be tracked down and forced to pay, he said. But he said the state revenue commissioner also has the power to exempt some businesses that account for an insignificant amount of proposed tax.

The council did recommend that some services, like babysitting, not be taxed because it would cost more for the state to collect the tax than it would collect.

Some just do not think the proposal is fair. Sherrie Jones, office manager for Inman Park Animal Hospital, first heard about the proposal to add sales tax to vet bills from the Georgia Veterinary Medical Association, which sent out a legislative alert urging members to mobilize against the plan.

"I was absolutely appalled," Jones said. "I don't feel there should be a tax on services, period."

Jones said she her state representative a message saying so. In addition, Jones said, the proposal calls for taxing health care for animals but not for people. That's not fair, she said.

"It just seems the politicians are not in contact with what is going on in the real world," she said. "You've got people making decisions on how to run a small business who have never done it."

---

The list

Here is the complete list of services the tax council proposes to tax

Clothing services

Household utilities

Other household services

Miscellaneous

Membership fees

Vehicle maintenance, repairs

Other vehicle-related expenses