A Taxing Situation

By Joe Crosby posted 01-25-2017 12:10

  
Here’s a Look at the Current Legislative Climate Across the U.S. – And What It Could Mean for Laundry Tax Exemptions

Taxes_money.jpgOver the last several years, we have seen a significant rise in the number of proposals to impose new state sales taxes on services. Laundry services – including self-service laundry – have regularly been a part of these revenue-raising measures.

Why are these proposals increasing in frequency? What is the outlook for 2017? How can we best engage state policymakers to help them understand the problems with extending sales taxes to laundry?

Why Taxing Services is Politically Popular

Several factors have conspired to put taxing services, or eliminating existing tax exemptions – collectively referred to as “sales tax base expansion” – on state legislators’ radars.

An underlying driver is a prolonged era of revenue constraints. The economic recession of the early 2000s and the Great Recession of the late 2000s were, by far, the two biggest state fiscal downturns of the post-WWII era. In both cases, most states experienced significant and prolonged declines in revenues. In the latter case, most states endured a multi-year period where inflation-adjusted revenues were below peak (with the peak generally being 2008).

At the same time, voters had little appetite for “raising taxes” – but they were (and are) open to “closing loopholes,” “ending corporate welfare,” and eliminating “tax cronyism.”

The final factor may be confounding to some. Beginning with the 2010 elections, Republicans began to win power in an increasing number of states, hitting post-WWII high-water marks in terms of number of legislative seats held and legislative chambers controlled in four consecutive elections (2010-16). This matters because many of these new legislators came to power based in part on promises to make their state’s economy more robust by reducing or eliminating income taxes, and instead relying more heavily on consumption – sales – taxes. And those Republicans had listened to conservative economists who implored them not to raise rates, but to expand the base.

These are the primary factors that have supported the introduction or consideration of sales tax base expansion in the states. The story in each specific state is unique, of course. And there are different motivations in some states – for example, in “blue” California, efforts to expand the sales tax base are driven not by a desire to make the tax system more competitive, but rather to make it “fairer” and more stable.

2017 Outlook

These same factors that have inspired sales tax base expansion proposals in prior years remain in place – or have strengthened – in 2017. By the time you read this, numerous such proposals will have been introduced in multiple states.

After a period of recovery, state revenues are again falling short of projections. About half of the states are facing budget deficits or shortfalls, according to a recent report from the National Association of State Budget Officers. Based on a newer data analysis my firm completed, we anticipate that 31 states will face some kind of revenue imbalance during the current fiscal year, which runs from July 1 through June 30 in 46 of the 50 states.

Some of the states on our list of those facing revenue challenges – such as Illinois, Connecticut, Louisiana and Kansas – are in the midst of protracted, years-long debates about how to deal with their structural fiscal problems. Other states are dealing with newer and less significant shortfalls and should be able to close their budgetary gaps without resorting to deep spending cuts or broad tax increases.

Fortunately, the news isn’t entirely bad. Recent economic data suggest that California is no longer facing a deficit, and Virginia’s deficit is significantly lower than we previously reported. Moreover, the bounce in the capital markets following last November’s election, and recent positive economic data, portend well for state revenues over the coming year.

Speaking of the November 2016 elections, Republicans at the state level not only maintained but increased their margins in state legislatures. They control both chambers of the state legislature and the governorship in fully half of the states. By contrast, Democrats have a “trifecta” in only six states.

As of January 2017, we anticipate sales tax base expansion proposals could emerge and be seriously debated in 16 states during upcoming state sessions. Legislation may be introduced in states other than those depicted in our map, but at this point we do not expect those proposals will receive serious consideration.

To help make sense of where the sales tax base expansion has occurred over the past several years, we’ve created a second map. 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).

Telling Our Story

Despite all of this activity, no state has enacted and successfully maintained a broad-based tax on services in recent years. Some more limited attempts have been successful, however, such as moderate expansions in North Carolina and the District of Columbia. More targeted proposals, especially those focused on consumer (rather than business) services are more likely to be successful, history shows. These facts put laundry services in the cross hairs.

But despite this attention, the industry has not only maintained its historic exemptions, but has also successfully advocated for the adoption of an exemption in Iowa. As a result, only three states – Hawaii, New Mexico and West Virginia – now impose sales tax on self-service laundry, and South Dakota imposes an annual licensing fee in lieu of sales tax.

The reason that the industry has fared so well despite this increased attention on expanding the sales tax base to services is because it has: (1) maintained vigilance to ensure early awareness of problematic legislation; (2) developed persuasive facts and arguments to share with policymakers regardless of political orientation; (3) organized collectively through the Coin Laundry Association and its chapters around the country; and (4) demonstrated a willingness to marshal the necessary resources to defeat objectionable proposals.

As of the time of this writing, it is too early to tell whether any of the proposals currently being drafted for consideration in 2017 will become serious threats to the laundry industry. Regardless, remaining vigilant, educating policymakers and being ready to engage in the political process when needed will continue to be critical to the industry’s state legislative success.
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