Editorial: Sales-tax insanity

As legislators in Harrisburg patch together a budget with baling wire and chewing gum, their scrambling effort highlights loopholes in the state sales tax.

The legislature might not be scrounging to pay for schools and roads if the statewide 6 percent sales tax were applied more fairly and were updated to reflect changes in the economy.

An article in Sunday's Inquirer pointed out there are few rules for deciding which goods and services get taxed in Pennsylvania. Sometimes an exemption boils down to which company or industry has the better lobbyist.

How else to explain that the state no longer taxes the sale of gold bullion, costing the state treasury about $3 million per year?

The exemption on basic necessities such as groceries and clothing makes perfect sense. But giving a pass on candy and gum ($100 million per year) does not.

"I'm pushing the candy [tax]," Gov. Rendell said in an interview with The Inquirer's Editorial Board before the tentative budget agreement. "Why not? What's Hershey [Foods Corp.] done lately for the state?"

Soda is taxed, but not relatively expensive bottled water ($27.5 million, on estimated sales of $458 million). Cell-phone service is taxed, but not landline phones. Cigarettes (and now cigarillos) are taxed, but not cigars or smokeless tobacco. Basic cable TV service ($113 million) is exempt.

The uneven application of the sales tax is perpetuated in a new proposal to impose a so-called "culture tax" on live arts performances (and museums and zoos). It would raise an estimated $100 million annually, but would exempt tickets to movies and professional sporting events.

Overall, sales-tax exemptions (including those on advertising in magazines and newspapers) cost the state well over $15 billion per year - or about half of the state's annual budget.

This system of picking winners and losers is due partly to the state's failure to keep up with changes in the economy. When the state sales tax was created in 1954, consumers spent more on goods than on services. Today, about 60 percent of all consumer spending is on services, yet most services aren't taxed.

Professional services such as legal, accounting, and consulting aren't taxed. Hair-, nail-, and tanning-salon services are exempt.

Sales on the Internet are another example. Congress has banned sales taxes on e-commerce, but states can impose sales taxes on Internet sales if the company has a physical presence in the state. New York state has enacted such a law, and it's expected to bring in more than $30 million annually.

The culture tax arose this month, without prior debate, mainly because legislators needed to fill a budget gap. Rather than single out winners and losers, the legislature should overhaul the sales-tax exemptions to create a level playing field for all.