Tax Issues to Watch in 2017: Taxation of Services

By Liz Malm | January 5, 2017
Topics: Budgets

Tax on services (TOS) proposals have become increasingly prevalent in state legislatures across the country over the last few years, and 2017 will be no exception. As of January 2017, we anticipate TOS proposals could emerge and be seriously debated in 16 states during upcoming state sessions. These predictions are driven by four factors:

  1. Deteriorating budget pictures in many states and a desire for new revenue sources (more information on that here);
  2. Changing politics post-election (more information on this here);
  3. A gradual shift in policy perceptions, with the desire to move away from income taxation and toward consumption taxation (often pushed and supported by Republican and free-market lawmakers); and
  4. States’ past interest in TOS proposals and top lawmakers’ recent statements indicating that TOS is on the table.

Note that TOS legislation may be introduced, or already has been, in states other than those highlighted below. The states below represent those states where several of the above factors have aligned, leading us to believe that TOS legislation could be seriously considered.

2017 TOS states to watch (3).png

See the table below for details on each of these states.

State Budget Trouble? Past TOS Bills? Political Landscape Additional Notes
Alabama ✔ ✔ Republican trifecta since 2011. Lawmakers are currently engaging in the tax study process and will make recommendations to improve Alabama’s long-term fiscal situation; TOS may be one of their recommendations.
Arizona   ✔ Republican trifecta since 2009. Lawmakers, including the governor, have promoted TOS legislation in recent years.
California ✔ ✔ Heavily Democrat and always interested in new, stable revenue sources to finance increased spending. Former Speaker and Senator Robert Hertzberg (D) has been advocating for a broader sales tax for several years, and his voice carries considerable weight. A TOS bill has been introduced every year for the past three years.
Georgia   ✔ Republican trifecta since 2005. Georgia lawmakers and stakeholders have expressed interest in comprehensive tax reform for several years, part of which would likely include TOS. Georgia also called a tax reform commission in 2016, where tax experts who proposed TOS in the past testified.
Illinois ✔ ✔ State government has had divided control since 2014, and budget impasses are the new norm. The governor has supported TOS in the past, and the idea has been floated as a possibility to help alleviate some of Illinois’ perennial budget troubles. A TOS bill has been introduced every year for the past three years.
Indiana   ✔ Republican trifecta since 2011. Indiana has a well-managed fiscal system, but increasing interest in “modernizing” the tax code has led to discussion of a potential TOS proposal in the 2017 session. Top lawmakers have expressed interest in exploring the idea soon.
Iowa   ✔ State became a Republican trifecta after the 2016 election. Iowa lawmakers and stakeholders have expressed public interest in comprehensive tax reform for several years. Lawmakers have already hinted that they’ll look at tax reform in the 2017 session, and that expanding the sales tax base will be a part of this discussion.
Kansas ✔ ✔ Republican trifecta since 2011. After an income tax cut that slashed the tax base several years ago, Kansas has experienced recurring revenue shortfalls. As state services such as education suffer, lawmakers have come under increasing pressure to comprehensively examine the state’s tax code, and discussions of tax expansion to services will likely arise.
Kentucky   ✔ State became a Republican trifecta after the 2016 election. The state ended the fiscal year with a surplus, and the governor hinted that he might call a special session to examine comprehensive tax reform. TOS will likely be discussed.
Louisiana ✔ ✔ Currently split between Republican and Democrat control. Budget trouble has plagued the state for years. With a split government, lawmakers are looking for areas to compromise and find long-term solutions to budget woes. TOS would meet both of those objectives. The state also has two current tax reform commissions: one to address the overall budget and tax system and one to “modernize” the sales tax.
Mississippi ✔ ✔ Republican trifecta since 2012. The state faced an end-of-year budget shortfall and the problem could grow worse in future years. Republican lawmakers announced that a series of working groups would be created to study the revenue structure with the goal of providing recommendations for the 2017 session.
Ohio   ✔ Republican trifecta since 2011. The governor and other lawmakers have introduced and/or supported TOS proposals in the past. Further, the state has undertaken a tax reform study with the goal of providing recommendations to move Ohio to a flat income tax (often these proposals include sales tax base expansion to pay for income tax rate cuts).
Oklahoma ✔ ✔ Republican trifecta since 2011. Oklahoma’s governor recently announced that she would consider taxing services as a means to close the state’s revenue shortfall.
Pennsylvania ✔ ✔ Currently split between Republican and Democrat control. The state has had ongoing budget trouble, and lawmakers have struggled to reach compromise solutions. At this point, TOS could be a potential long-term solution to ongoing budget shortfalls and resulting impasses. Further, in 2015, the governor proposed expanding the sales tax to certain services, and a TOS bill has been introduced every year for the past three years.
South Carolina   ✔ Republican trifecta since 2003. A TOS bill has been introduced every year for the past three years. Several years ago, a tax reform commission recommended expanding the sales tax to services. As neighboring states consider TOS proposals, TOS is likely to come up in South Carolina, as well.
West Virginia ✔ ✔ Currently split between Republican and Democrat control. A tax reform interim committee met in 2015 and continues work in 2016 to study the state’s tax code comprehensively; a TOS proposal will likely be a part of its recommendations.

To help make sense of where the TOS action has occurred over the past several years, we’ve created a reference map. The map below shows states in which TOS legislation has been introduced over the last three years. Darker colors indicate higher and/or more recent activity. Six states have introduced TOS legislation every year over the last three years (California, Illinois, Missouri, North Carolina, Pennsylvania, and South Carolina). Despite all of this activity, no state has enacted and successfully maintained a broad-based TOS in decades (some more limited attempts have been successful, however, such as moderate expansions in North Carolina and the District of Columbia in recent years).

TOS- Recent Year Action (1).png

We’ll continue to keep an eye on TOS legislation as more states begin their 2017 legislative sessions and report any updates here on MultiState Insider. If we missed any states to watch, please let us know!

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