Group Argues for Applying Sales Tax to Far More Services in New Jersey

John Reitmeyer | February 22, 2018 | Budget
Case being made that revenues would grow, sales-tax structure would be fairer, and online retail sales should also be targeted for greater tax take

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It’s been more than a decade since state policymakers last revised the list of services that are subject to the general sales tax in New Jersey, and with the state constantly struggling to keep up with costs related to things like education and public-employee pensions, some are beginning to question whether it’s time for another update.

Among several recommendations included in a new report on state tax policy from the progressive New Jersey Policy Perspective think tank is a call to significantly expand the state’s list of taxable services, particularly those that cater to higher-income residents, like investment counseling and interior decorating.

Such a change would grow revenues, the group argues, while also adding more equity to the sales-tax structure as the service sector of the state economy continues to expand.

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“Levying sales taxes on more services would make New Jersey’s tax systems not only fairer but would help to create a more stable tax base over the long term and may help reduce the year-to-year volatility of sales tax collections,” the report suggests.

More revenue from online sales

The report also recommends a further updating of the state tax code to capture more revenue from online retail sales, and some services that weren’t even available when the last major revision occurred in 2006, such as short-term property rentals that can now be set up entirely online. And it calls for sales-tax cuts that were enacted during former Gov. Chris Christie’s tenure to be immediately repealed to help ease state budget problems.

NJPP’s report was released just weeks before Gov. Phil Murphy is due to present his first state budget to the Legislature; making changes to the sales tax could eventually become a serious option for Murphy to consider, especially if he continues to face resistance from more than just Republicans to his call to hike income taxes on millionaires. The report also comes out just as Senate President Steve Sweeney — who is among those pumping the brakes on the millionaire’s-tax proposal — has announced that lawmakers are starting their own wide-ranging review of state tax policy in response to the federal tax-code overhaul that was enacted late last year by President Donald Trump.

While a bipartisan tax deal that was agreed to by Christie and Democratic legislative leaders in 2016 resulted in an immediate 23-cent hike of New Jersey’s gas tax to bring in more revenue for spending on transportation projects, it also involved a series of phased-in tax cuts, including a two-step reduction of the state sales tax. Under that deal, the sales tax was lowered from 7 percent to 6.875 percent at the start of 2017, and again this year to 6.625 percent.

Now fully phased in, the sales-tax reduction is estimated to have hit the state budget by roughly $400 million in the current fiscal year, rising to near $600 million during the fiscal year that will begin on July 1.

Barely notice sales tax increase

The NJPP report argues that most New Jersey residents are barely noticing the slight cut. For example, since items like food and clothing are exempt from the sales tax, low-income residents are saving just 62 cents per week. At the other end of the scale, those in the top 1 percent are saving just $14 per week, according to NJPP.

“That $2 morning coffee now costs two cents less, but the cost to our nearly-bankrupt state is great,” said NJPP senior policy analyst Sheila Reynertson, the author of the report.

In addition to generating new revenue by restoring the 7 percent sales-tax rate, and repealing a reduction of the sales tax charged on boat purchases that was also enacted by Christie, the report calls on policymakers to update the list of services that aren’t currently subject to the sales tax. It lists dozens of services like real estate management, loan brokerage, and data-processing as examples, but specifically targets those that cater to high-income residents. Limousines, chartered flights, accounting, and bookkeeping are among those cited.

“As services become an even larger part of household spending, New Jersey’s sales tax must adjust and adapt,” the report said. “The taxation of services also allows state policymakers to fold them into the sales tax code with a focus on high-end services to make the tax code fairer.”

Last major revision was in 2006

If Murphy and lawmakers do make changes in this area, it would be the first significant revision since former Democratic Gov. Jon Corzine’s decision in 2006 to add services like those provided by tanning salons, massage parlors, and tattoo artists to the list of those that are subject to the sales tax. A call to further modernize state sales-tax policy was made during the 2009 gubernatorial election by independent candidate Chris Daggett as part of a broader proposal to ease the pressure on property taxes, which remain a key concern for New Jersey residents.

But yesterday, Assembly Republican Conference Leader Anthony Bucco (R-Morris) warned his colleagues against making the changes recommended in the NJPP report, including repealing the sales-tax reduction that Christie fought Democrats for in exchange for the 2016 gas-tax hike.

“While it’s small, it’s something,” Bucco said of the reduced sales-tax rate.

A nice way of saying ‘more things to tax’

He also cautioned that talk of “modernizing” tax policy usually ends up with residents simply paying more in the long run. “That’s just a nice way of saying, ‘We’re going to find more things to tax,’” Bucco said. “I can’t think of it any other way.”

However, Bucco said he did share NJPP’s concern about the proliferation of online retail sales that don’t result in New Jersey sales taxes being collected, something that puts the state’s taxpaying brick-and-mortar retailers at a competitive disadvantage. The team of fiscal-policy experts that Murphy’s transition organized to look at state budget issues raised a similar concern in a report issued last month.

While it could take federal legislation to come up with a real long-term fix for that problem, the NJPP reports calls on New Jersey to emulate Colorado by enacting a law that requires online retailers to do more on their end, including by mailing annual summaries to customers with their estimated state sales-tax liability. NJPP also calls for the revival of legislation vetoed by Christie last year that would have made short-term property rentals provided through online marketplaces like Airbnb subject to taxation in New Jersey, just as hotel rooms are.

“It was estimated that the bill would generate more than $6 million in sales tax revenue and help to level the playing field for New Jersey’s lodging industry,” the report said.