On Election Day, Missouri voters overwhelmingly approved (57 percent to 43 percent) Constitutional Amendment 4, which will "prohibit a new state or local sales/use or other similar tax on any service or transaction." In English, if a product or service wasn’t taxed before the referendum it will never be taxed. That obviously sounded like a good deal to a lot of Missouri voters—it's not.
Supporters sold Amendment 4 as a way to help low- and middle-income families. From the Yes on 4 website: "Amendment 4 protects those who are least able to afford new taxes, including senior citizens, the disabled and others on fixed incomes."
True, state sales taxes are regressive. But when a state permanently exempts new services from tax it effectively guarantees higher rates on purchases that are already taxable. In Missouri, this includes a lot of necessities such as clothes, food, and drugs (Missouri taxes grocery food but at a lower rate; prescription drugs are exempt but nonprescription drugs are taxed). Low- and middle-income families are far more likely to buy these items than untaxed services.
The root problem is all state sales taxes were created in the 1960s or earlier (Missouri's started in 1934), when consumers mostly bought goods. As services became a larger part of the consumer economy, lawmakers had to specifically add them to the tax base. But it’s politically tough making a new purchase taxable because sellers become a powerful constituency against the change. It was no accident that such businesses were key backers of Amendment 4.
When states cannot expand their tax base to services, including online services, they often raise sales tax rates. From 1984 to 2012, consumer expenditures on generally tax-exempt purchases increased from 34 percent to 40 percent; between 1984 and 2014 38 of 45 states with a general sales tax increased rates.
Nearly all tax experts support expanding the sales tax base. Taxing more items is fairer: Why should a consumer be taxed for buying a shirt but not for getting it dry cleaned? It is also a way for governments to raise revenue without raising tax rates. A study in the District of Columbia (DC) found adding a few services to its tax base raised more revenue than a 0.25 percent rate hike.
And some states are moving in that direction. In 2014, DC added bowling, car washes, and health club services (among others) to its tax base. In 2016, North Carolina added car, shoe, and jewelry repairs. Pennsylvania recently made digital downloads (e.g., Netflix subscriptions, e-books, etc.) taxable.
Missouri will eventually raise taxes. Its general revenue is stagnant. (And if revenue recovers, some of it is already dedicated to income tax cuts.) The state has been fighting over diminishing education funds for years. An economic recession could cripple its finances.
Making more services taxable would have been a smart way to find new revenue. And if the state was concerned about low- and middle-income families it could have added services that are luxuries or pastimes (yoga, Netflix) or professional services used by a select few (accountants, law firms) instead of services used by residents of all incomes (child care, haircuts).
But thanks to this initiative, the state has tied its hands. When Missouri needs additional revenue, it'll have to come from an increased sales tax rate. The result: The state will increase the cost of most products sold at Target and Wal-Mart, while leaving countless other purchases untaxed.
