Editorial

Willy-nilly service tax is unfair, unpredictable

The Detroit News

The sales tax on certain services that was adopted as part of the state budget deal early Monday morning is one of the most unfair and foolishly crafted pieces of legislation ever to come out of Lansing.

By now, the arbitrary nature of the tax has been well publicized. Lawn mowing won't be taxed, but flower planting will. Haircuts won't be taxed, but bikini waxes will. Accounting services won't be taxed, but consulting contracts will. And so on.

The Granholm administration, which put together the list of services to be taxed and did the revenue estimates, says the goal was to hit "discretionary" services and not essential ones.

But discretionary is in the eye of the beholder. A company in need of a consultant to help turn around its business might not consider that expenditure so discretionary. Nor might those looking to outsource janitorial services to save money.

Reports out of the Capitol suggest the more significant determining factor in who got taxed and who didn't was the clout of the Lansing lobbying corps.

There are so many other problems with this bill that it would be smart for the Legislature to reconsider what they've done, now that the pressure of a government shutdown deadline has passed.

A primary concern is that estimating the revenue the tax will bring in is an inexact science. Many of the services to be taxed are on the fringes of the economy. Palm reading and escort services, for example.

The assumption is that these businesses will report and pay the sales tax on all of their transactions. But that's a leap of faith. Enforcement promises to be a major headache for the state, and the bookkeeping a huge challenge for the small businesses.

The state is counting on the tax to produce more than $600 million to balance next year's budget, and then more than $700 million the following year. If it doesn't, what's the fallback plan?

The Michigan Chamber of Commerce frets that the service tax might actually bring in far more than the administration estimates, providing a windfall that will be used to expand government.

Also of concern to those who want to contain the tax burden is that a service tax is easier to expand than the income tax. Gov. Jennifer Granholm fought to keep the service tax component in the package, rebuffing a Republican counter-offer of a more substantial income tax increase.

We suspect the motivation for clinging to the service tax is that the list of taxable services can be quietly stretched to cover future budget deficits. The service tax could become Michigan's automated teller machine, available for tapping whenever cash runs short.

Already, groups affected by the new sales tax are threatening a ballot initiative to repeal it, as has happened in some other states that followed this path.

They have a case that the tax is being applied unfairly. The fairest taxes are those that are the most broadly based.

The willy-nilly approach used to pick the list of services makes the case that Michigan will be engaging in unfair taxation.

That's not the message a state desperate for jobs and investment wants to send. Lawmakers should use the 30-day extension of the budget negotiations to come up with a better plan.