The Vermont Tax Structure Commission released its 180 page draft report to the legislature, and one of the major recommendations it makes is to expand Vermont’s 6% sales tax, currently limited to goods and a few singled out services such as ski rentals, to everything but healthcare, and to reduce the overall rate to 3.6%.

In addition to taxing things like haircuts, lawn care, auto maintenance, education, plumbing, carpentry, legal aid, and education (the list goes on and on), current exemptions to the sales tax such as food, clothing, and residential energy would also be taxed.

This is a terrible proposal.

First of all, the service sector of our economy has been devastated by Covid restrictions. One can still sell goods through the mail or curbside if the government shuts down your store (not to insinuate that retail has it easy during the pandemic), but you can’t give someone manicure, or provide physical therapy at all under the same circumstances. Whacking these businesses as they try to re-establish themselves with not only the cost of a new tax but the logistical responsibility of collecting, accounting for, and remitting the tax would be especially cruel.

Second, even in good times, lest we forget, our neighbor to the east, New Hampshire, has zero sales tax on goods or services. We’ve seen what Vermont’s competitive disadvantage in this area has done to retail businesses along the Connecticut River. Increasing our sales tax on services from 0% to 3.6% would create a similar giant sucking sound.

The Commission admits this. “[O]ur recommendation to broaden the base and lower the rate would mean that there would be a slight decrease in demand for the roughly 50% of purchases of goods and services that are not currently subject to the sales tax.” (P.65) But, they argue that this would be offset by increased demand for goods where the tax is lowered from 6% to 3.6%. This is flawed logic.

As noted before, New Hampshire’s sales tax is zero. Vermonters are already conditioned to jump the border to purchase goods with zero sales tax – it’s “FREE.” Lowering the Vermont rate by 1.4% is not going to influence that dynamic. However, raising the tax on Vermont’s service sector from “FREE” to 3.6% while simultaneously competing with a free alternative just spitting distance away will not end well for Vermont’s service sector. (Recommended: check out this article on the behavioral impact on consumer behavior of free.) Our prediction: all that will happen is that Vermonters who now cross the river to buy their TV’s and toasters (not to mention liquor), will start getting their hair cut and nails done on those trips as well.

But, isn’t it unfair to businesses that sell goods to slap them with a tax but not businesses that sell services? Sure. But let’s not remedy that by equally spreading misery, and rather work to eliminate the Vermont sales tax altogether. If Alaska, Delaware, Montana, Oregon, and New Hampshire can do it, so can we!

- Rob Roper is president of the Ethan Allen Institute.