A Second State Could Ban Service Taxes

As taxes on Netflix and yoga gain favor as a way to raise revenue, a movement to stop them is growing. In November, the debate heads to Arizona.



OCTOBER 17, 2018

List of streaming services on a screen.



  • Governments have struggled to raise revenue since the recession, leading some to start taxing services like Netflix and yoga.

  • In response, Arizona could become the second state to ban any expansion of the tax on services.

  • The November ballot measure is supported by many industries but opposed by policy experts and politicians on both sides of the aisle, including Republican Gov. Doug Ducey.

More governments are looking to expand their sales tax to services like Netflix and yoga. Already, half of states tax fitness studio classes or memberships, while places like Chicago, Florida and Pennsylvania have all started taxingonline streaming services in recent years.

But there's a growing movement in conservative states to stop that trend.

Next month, voters in Arizona will consider whether to make their state the second to ban any expansion of the state’s already limited tax on services. 


, the state only taxes certain types of software services and some transportation services.

Dubbed the Protect Arizona Taxpayers Act, Proposition 126 is backed largely by the Arizona Association of Realtors, which has poured more than $5 million into the campaign. Two years ago, the state realtors association in Missouri funded a similar ban, which won handily at the ballot box.

Supporters of the ban, which include a wide swath of industries from pet shops to child care operators to physical therapists, argue that expanding the sales tax is a threat to lower-income consumers who already pay a larger share of their income to sales taxes than the wealthy.

“A service tax would increase the cost of child care, adding an unfair burden on working families,” James Emch, CEO of a Phoenix-area chain of child care centers, said in a statement. “This initiative will make it possible for parents across the state to rest easy knowing there is one less cost to worry about.”

But policy experts warn that such a ban limits a state’s revenue-raising options and could actually be a greater burden on the poor. Across the country, states have struggled to keep up the same revenue growth as they experienced before the recession. One big reason is that consumers are spending far more on services -- most of which aren’t taxed -- than goods, which are. Without the ability to expand the sales tax base, lawmakers looking to stabilize their slowly shrinking revenue would only be left with the option to raise the sales tax rate.

“That does not portend well for the future of the sales tax as a state revenue instrument,” says Scott Drenkard, the conservative-leaning Tax Foundation’s director of state projects. “It prevents Arizona from having a sufficiently broad sales tax base and is harmful to the long-term productivity of the tax.”

Meanwhile, the centrist think tank Grand Canyon Institute issued a report last week warning that passage of Prop. 126 could make it more likely that lawmakers would let the existing taxes on services expire.If that happened, it would mean an annual $250 million loss in education money starting in 2021 and up to a 44 percent cut in regional transportation taxes in Maricopa and Pima counties when they come up for renewal in the next decade.

Even Republican Gov. Doug Ducey, who opposes any tax hike, panned the proposition.

“I think putting a permanent and unchangeable tax policy at the ballot box is a bad idea,” Ducey said during a campaign stop last week.

The measure also faces opposition from Ducey’s Democratic opponent, David Garcia, a bipartisan group of state and local lawmakers, and organizations across the political spectrum.

Despite that, a recent poll from Suffolk University and The Arizona Republicshows nearly half of the state's likely registered voters support it. The survey conducted at the end of September found 48 percent said they would vote yes, while 31.4 percent would vote no and 20.6 are undecided.

For a full summary of November's most important ballot measures, click here.