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(note: this story originally ran on April 3)

Across the country, states are modernizing their sales tax to reflect changes in the economy, but not Wisconsin. This state’s sales tax is far less inclusive in what it taxes, meaning less revenue is collected – which might surprise the many observers who’ve long complained about Wisconsin’s tax burden.

A recent study found a total of 168 services that at least some states tax. Wisconsin taxed only 76 of them. A total of 19 states tax window cleaning, but this state doesn’t, according to The New York Times. Neither does Wisconsin tax massage services, taxed by 11 others, interior design, taxed by

ten others, dating services, taxed by eight others, or haircuts, taxed by seven others.

Wisconsin pays more income and property taxes than the national average but less in sales tax, according to Dale Knapp, research director of the Wisconsin’s Taxpayer Alliance, a non-partisan tax watch group.

Like Arkansas, Connecticut, the District of Columbia, Iowa, Kansas, Mississippi, Nebraska, New Jersey and Texas, a study by the Federation of Tax Administrators says, Wisconsin taxes utilities and labor and repair services but doesn’t tax most professional services.

And there’s little motivation to change that, Knapp says. “There have been proposals to tax more services, but they haven’t gotten very far.”

He adds, “States are going to have to rethink the sales tax. The sales tax was created when we were a manufactured-good oriented economy. Now we’ve become much more services-oriented. Those aren’t getting taxed.”

The transition to a service-based economy began happening about 50 years ago, according to Jim Eads, FTA’s executive director, but antiquated state sales tax codes have lagged far behind. Most were written in the late 1920s and 1930s, he says.

States that are busy updating their sales tax, particularly Michigan and Pennsylvania, are adding a host of new services to their codes.

White collar bias?

Wisconsin’s sales tax draws from large blue collar services but not white collar ones.

It taxes landscaping, carpet cleaning, fishing and hunting guides, shoe repair, dry cleaning, swimming pool cleaning, printing, sign construction and installation, tire repair, car washing and towing, bulldozer and tool rentals, repair work, taxidermy, dog grooming, horse training, welding and other services at the state’s standard 5 percent rate.

It doesn’t tax veterinary services, insurance services, investment counseling, loan brokering, real estate services, debt counseling, funeral services, tax return preparation, massage, golf or dance lessons, advertising, newspaper or magazine sales, debt collection, graphic design, private investigation, public relations, security services or work by attorneys, architects, dentists, engineers, accountants, doctors, nurses or pilots.

State sales tax exemptions fall along similar lines, according to a state Department of Revenue publication. Medical, manufacturing, biotechnology and some broadband internet equipment are exempt. When businesses cease operations, they can sell off their equipment without having to return sales tax to state government.

Other labor services are treated differently. A contract is classified as “a consumer when constructing, installing, repairing or servicing real property, such as buildings,” the publication says. “The contractor must pay sales or use tax on materials and supplies used in such activities.” Purchases of tools and other equipment contractors use are also not exempt.

Since 2007, there have been no changes in the services taxed in Wisconsin, according to DOR spokeswoman Stephanie Marquis. One of the biggest sales tax changes, she says, was the expansion of taxes on computer software and digital goods. The state Legislature passed the changes in 2009.

Taxing the Girl Scouts

Eads says Michigan and Florida tried to tax services but “it created havoc and was repealed.” Legislators retreated like they had wandered onto political hot coals.

But Michigan is trying again. Gov. Jennifer Granholm introduced a proposal earlier this week that would raise more money from the tax by expanding its base – while lowering the overall rate. Facing financial ruin, she’s proposing taxes on services to rescue her state’s schools from disaster.

A number of states are turning to sales taxes to prop up their finances as income taxes languish in the recession. But Wisconsin isn’t one of them.

But the state Legislative Fiscal Bureau, the non-partisan research group that advises the state Legislature, warned in June 2009 that the state could face a $2.2 billion budget shortfall by 2003 if existing policies continued. But by July, budget cuts and an income tax increase for wealthy Wisconsinites had balanced the state budget, state officials claimed.

Raising taxes is never easy. Eads tells a story about repeated attempts in the New Mexico legislature to impose sales taxes on non-profits, which are normally exempt.

Each year lawmakers tried, when they convened a public hearing on the bill, state Girl Scout leaders showed up with a line of little scouts behind them. They offered up dramatic testimony, and the response was always the same. The legislators cracked.

By the end of the hearings, Eads says, at least one of the lawmakers would reassure the scouts, “Don’t worry sweetheart, we’re not going to tax your cookies.”

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