The Status of State Efforts to Tax Services in 2023

State legislators have expressed ongoing interest in expanding the sales tax to new services, and we’ve covered the issue before, but there was an uptick in legislative proposals early this season. With Republicans proposing sales tax base expansions as part of a push to eliminate income taxes, and other efforts to “modernize” the sales tax with a goal of diversifying revenue portfolios, politicians across the country have been exploring this issue with renewed interest. 

Given that level of activity, we wanted to provide a rundown of where those efforts stand. We’ll organize our examination based on the motivation behind these proposals. 

Income tax elimination/reduction efforts 

A number of prominent Republican lawmakers have said that they want to eliminate or significantly reduce the income tax. So far none of these income tax elimination proposals include any new taxes to backfill lost dollars, but, given that the income tax can comprise more than a third of state revenues, budget writers may need a “pay for” sooner or later. Historically, we have seen that when Republicans are pressed to find new, large sources of revenue, they will often seek to expand the sales tax base.

West Virginia senators have recently said that they may amend Governor Jim Justice's (R) personal income tax cut proposal (WV HB 2526) to include an unspecified sales tax component (although the governor says that idea would "probably not have a prayer with me"). Additionally, we're aware of several states quietly considering the idea of taxing services in order to fund income tax cuts. We’re keeping a close eye on those states for any relevant bill introductions.

Revenue diversification in energy-rich states 

Unlike other states that seek to expand the sales tax to eliminate income taxes, several states have introduced sales taxation of services legislation because budget experts have long wanted to diversify the state's revenue portfolio. They are specifically concerned that these states’ heavy reliance on energy taxation could lead to fiscal problems should energy markets take a significant, prolonged downturn.

In this vein, in January Wyoming lawmakers considered a bill (WY HB 72) that would have expanded the sales tax to nearly all services, with the notable exceptions of banking and legal services. Lawmakers in Wyoming have proposed similar legislation in the past, but those introductions were defeated in the face of intense opposition from taxpayers. This year’s bill met a similar fate: during a January 17 hearing, the Revenue Committee unanimously voted down HB 72 after receiving firm opposition.

Wyoming is not the only state we are watching. Alaska and Montana have also considered expanding the sales tax base, or, in Montana’s case, adopting abroad-based sales tax, with Alaska giving it particular attention in late 2021 as a means of reducing budget reliance on the state’s extremely popular Permanent Fund. Thus far, no legislation has been introduced in either state.

Efforts to tax services in energy-rich states are driven by ongoing fiscal concerns, so as long as those concerns persist the policy discussions will continue. That said, it is unlikely that they will gain the necessary political traction unless the energy markets take a significant, prolonged hit. 

Other Pending Legislation 

There are four other live, pending bills that would significantly expand the sales tax base to services. A pair of Nebraska bills (NE LB 79 and NE LR 7) would replace most of the state's other taxes with a new expanded sales tax and apply the sales tax to all "new goods and services," respectively. Both of these bills are sponsored by Sen. Steve Erdman, who does not sit on the Revenue Committee. However, Governor Jim Pillen (R) has already laid out his fiscal agenda for the session, and it centers on a comparatively modest set of cuts to the income tax, which will likely complicate Sen. Erdman's plans for radical reform.

In Texas, a pair of bills (TX HB 268 and TX HB 577) would impose a value added tax (VAT) on the sales of all services and property. These bills are sponsored by Rep. Steven Toth (R) and Rep. Terry Wilson (R), but, as of now, these bills are unlikely to move.