Should Oklahoma broaden the sales tax to more services?

Certified ServiceAs part of her effort to close the state’s budget shortfall and avoid devastating cuts, Gov. Mary Fallin has proposed $910.5 million in additional revenues in her FY 2017 Executive Budget. The largest revenue item involves changes to the sales tax, which she labels “sales tax modernization.” In her State of the State speech, the Governor explained that, “Modernizing the sales tax code means keeping the same low rates and applying them in ways that better reflect today’s commerce and consumer behaviors.”

Her sales tax proposals involve four components: applying the sales tax to selected services; eliminating some sales tax exemptions; applying the sales tax to items delivered electronically; and improving sales tax auditing with enhanced technology. Collectively, these changes are estimated to generate $200 million in additional recurring revenues. However, the Governor’s budget offers no details as to which services should be taxed or which exemptions should be removed. She does suggest that “if structured properly,” the revenue from broadening the sales tax base could increase overall sales tax collections and allow for a lowering of the state’s sales tax rate.

This post looks more closely at issues surrounding taxing services; a follow-up post will look at the other sales tax proposals, as well as options for enhancing collections from online sales, an idea that was not explicitly part of the Governor’s proposal. (This article borrows from a 2011 OK Policy report, “Fixing the Sales Tax: Options for Reform”, which explored the ideas now being proposed by Governor Fallin. Our brief was in turn indebted to work by Michael Mazerov of the Center on Budget and Policy Priorities.)

How Oklahoma compares

Although 45 states levy a sales tax, most do not apply it to most services. States on average assess sales tax on 55 out of 168 services identified as potentially taxable by the Federation of Tax Administrators in 2007. Hawaii, New Mexico, South Dakota and West Virginia are the exceptions among states in taxing services comprehensively. Several other states, including Arkansas, Kansas, and Texas, tax a large number of services. These states widely tax utilities, admissions/amusements, and labor and repair services, but leave professional services — such as legal fees — largely untaxed.

Oklahoma currently taxes 32 of 168 services, according to the FTA’s survey. These include utility services for industrial use (e.g. electricity, natural gas and telephone, but not water), residential phone services, admissions and amusements (e.g. bowling alleys, club memberships, and video tape rentals), and leases and rentals. Among services that are frequently taxed in other states but not in Oklahoma are residential utilities, repair labor, auto services and washing, long-term automobile leases, service contracts, cable television, and overnight trailer park rentals.

The case for taxing services

Taxing_Household-ServicesThere are several strong arguments in favor of expanding the sales tax to more services:

  • Taxing services more broadly is essential to maintaining the long-run adequacy of the sales tax. The long-term shift of consumption from goods to services is highly unlikely to be halted or reversed. Without policy changes, this will mean a continuous erosion of revenue for Oklahoma’s state and local governments.
  • Taxing services would make the sales tax more economically fair and rational. Since the sales tax is intended to be a general tax on consumption, there is little reason to tax the consumption of goods but not of services, which in fact can be substitutes for one another.
  • Taxing services will likely make the overall tax system more stable. The sales tax base is dominated by purchases of big-ticket durable goods, such as cars, appliances and furniture, which often decline sharply during an economic downturn. By contrast, the purchase of services does not rise or fall as sharply over the course of a business cycle. This means sales tax revenue would fluctuate less if more services were included under sales tax.

Which services to tax?

One consideration when deciding what purchases to tax is whether they are a household necessity, especially for low-income households. For example, many states do not tax groceries to avoid increasing the cost of basic nutrition (though Oklahoma is one of the few states that does tax groceries at the full rate).

When looking at services, some currently untaxed services might be considered discretionary and are purchased primarily by more affluent consumers (for example, dry cleaning, horse boarding and investment counseling). However, expanding the sales tax might also end up covering some essential household purchases. In particular, the list of currently-untaxed household services in Oklahoma includes residential utilities, such as electricity, gas and water. The sales tax would also potentially apply to purchases such as hair cuts, car repairs and veterinary services that would affect a broad segment of the population.

Another key policy question concerns whether to tax all categories of services or to limit the tax to services that are consumed primarily by households rather than businesses. Most economists and tax specialists, from across the ideological spectrum, caution against taxing businesses’ purchases, whether goods or services, that go into the production of other goods and services. This is because of the risk of “tax pyramiding,” in which taxes are passed on to consumers in the form of higher costs. Taxing business purchases also creates the risk of making local businesses less cost-competitive compared to those based in other states and could lead a business that makes substantial purchases of taxable services to expand or shift production to states that exempt these services.

As a result of these concerns, the Center on Budget and Policy Priorities recommends that states assess services consumed primarily by households (such as hair salons, bowling and health clubs), while exempting services consumed primarily by businesses (such as advertising, payroll processing, and accounting).

How much revenue could taxing services generate?

There have been two attempts to generate estimates of the potential state revenue for Oklahoma from extending the sales tax to more services.

In his study on taxing services, Michael Mazerov calculated the potential revenue for the state of Oklahoma of expanding the sales tax to cover services that are primarily consumed by households as $792 million as of 2007. Mazerov acknowledges that this estimate is likely overstated because it assumes no taxation of existing services, though some household services are already subject to taxation in Oklahoma (see Table). In addition, adding a tax on services would lead to some shift in consumer behavior and create some new costs to ensure compliance and collection.

The second estimate was developed for a 2002 Task Force convened by Gov. Frank Keating, which recommended taxing 32 new services. This list was considerably broader than household services, as it included purchased made primarily by businesses, such as legal services, accounting, non-residential maintenance and repairs, and others. This proposal was estimated to generate an additional $821 million, an amount which would be considerably greater more than a decade later.

Unquestionably, gaining legislative support for any proposal to broaden the sales tax base to new services will be enormously difficult. Every industry that is currently exempt will fight hard to avoid being taxed, while many interest groups that grasp the need for new revenue to prevent devastating budget cuts will not easily lobby for new taxes.  A bill to broaden the sales tax to cover any service currently taxed by a neighboring state and by at least 25 states in total, SB 1484, has been introduced by Sen. Clark Jolley and has been assigned to the Senate Finance Committee. Another bill introduced by Sen. Jolley, SB 1275, creates the  Task Force for the Study of the Oklahoma Sales Tax Code with a mandate to develop recommendations that would lead to a vote of the people in 2018; it has passed out of Senate Finance and awaits floor action.

Learn More // Do More


Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

9 thoughts on “Should Oklahoma broaden the sales tax to more services?

  1. Sales tax are a regressive tax, impacting the poor and middle class much more severely than the wealthy.
    Raise the income tax and corporate tax and be fair to everyone. Republicans will never raise income taxes unless as a last resort. Since they do not have a 3/4 majority in the Oklahoma House, the Democrats will determine what if any taxes are raised.

  2. When I was growing up there was a 10% tax (Federal Excise Tax) on “luxury” goods like furs and jewelry that has since been eliminated. Groceries in that state were and are not taxed. I am frequently told by locals how much cheaper food is here. With our current tax on groceries they really are not. They have become a “luxury”. Eliminate the tax on groceries then maybe I will be for taxes on some other things formerly not taxed. The wealthy have been quite clever manipulating the responsibility for taxes.

  3. When my parents visited here this past August they were absolutely shocked that our food was taxed and that our sales taxes were so high. It just makes sense to me that adding a fuel tax would fair and widespread, everyone needs and buys fuel. A cigarette tax hike would be so cost prohibitive for those who smoke that the decrease in overall sale would make the tax hike ineffective. Also criminal justice reforms would do a lot in broadening the tax base, when people are incarcerated they can’t work so no income taxes are collected, they don’t buy things which means no sales tax is being collected and often their families need more social services.
    Again, the people of Oklahoma who will suffer the most of the ineffective policies and glad-handing politics going on at our capitol are the sick and the poor. How christian is that?

  4. As a small business owner in a service related industry, I would have to pass the taxes on to my customers. In addition I would have to raise my rates to cover the administration of collecting and submitting these taxes to state , county and city government. Everyone that I know that is in business would have to do the same. Businesses only pass taxes and fees on to consumers. Everyone needs to think long and hard about what this will mean to their budget and the services they purchase.

  5. If our government and state would stop putting the money in their own pockets we would not have to have more taxes… they continually lie to us about the budget etc to make us think we need to raise taxes… Quit wasting our money !!! I don’t understand wanting to raise the cost of cigarettes 1.50 more as that is only going to lead to more thefts… wake up Oklahoma you are bring taxed to death because our tax dollars are being wasted….

  6. Been here 10 years now and I still don’t understand why things are the way there are.

    I can tell you we tax the lower middle class to death with our food tax, high income tax a low income levels and a host of other fees and taxes.

    Now they want to add 9 or 10 percent to our utility bills and other important services.

  7. If it isn’t bad enough already as a small business owner in this state, taxing services provided will squeeze the last breath out of my business. I have been treading water working longer hours for less pay as it is hoping the economy will get better. This will simply be the end for me.

  8. Sales tax is the only legitimate tax, and even that should be kept microscopically low. Income tax penalizes earning money, mandates invasion of privacy, encourages tax evasion, and forces citizens to subsidize non-citizens.

  9. We moved here to start a business, thinking it was a “business friendly” state. After 11 years I am fed up. The only business they are friendly towards is oil/gas. You have the resources so tax them where else are they going to go? I become so irritated when I hear there isn’t money for the kids to get a good education – tax the oil/gas companies. The work force is not up to snuff already so you are going to make sure that future generations are in better shape. I am sad to let our work force go because they are getting paid good wages and they are good people but I will not stay in a state that does not value secondary education it is the beginning and basis for all learning. My children are grown, but not my grandkids and I want the best for them. Parents you need to demand better for your children they deserve a chance! Our state government sucks! Fuel tax, cigarette tax, etc…these hurt the consumers – go after the oil/gas industry. They are hurting Oklahoma with earthquakes and I am sure down the road we will discover our water source has been affected. Look how many are on wells here. When are we going to make them pay!!! I hate that industry and I am winding down and closing my doors and moving out of the state – I cannot stand the stupidity any longer!!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.