When Snyder & Associates Inc. bids on engineering projects, it’s often competing with firms based in Chicago, St. Paul, Omaha and other larger cities.

If the Ankeny-based consuting engineering firm had to begin charging Iowa sales tax on services it provides within the state, “in terms of cost, we’re immediately at a 5 percent disadvantage to those firms that hire our (state’s) graduates already,” said Dave Moeller, the company’s vice president.

A bill is now making its way to state legislators that would extend the sales tax to engineers, accountants, public relations professionals and 13 other categories of service-related businesses, under a proposal made by Gov. Tom Vilsack in his Condition of the State message. Currently, about 75 categories of services, from car washes to massage therapists, are taxable.

Though the director of the Iowa Department of Management says the tax expansion was tailored to the industries with clients that could most afford to pay more, the head of the Iowa Association of Business & Industry opposes the move, saying that instead of increasing taxes, state agencies should do more to reduce expenditures.

The measure would raise an additional $208.3 million in revenues in Fiscal Year 2005, and is the single largest source of additional revenues proposed by the governor. In comparison, the proposed 60-cent-per-pack hike in the cigarette tax would bring in $108 million next fiscal year; the gambling tax increase would bring in $57 million. In fiscal year 2003, the state collected $1.45 billion in sales taxes, which made up about 30 percent of Iowa’s total tax receipts.

At the same time, the governor has recommended the Legislature cut the sales tax rate from 5 percent to 4.25 percent, a 15 percent reduction, over a four-year phase-in beginning July 1, 2006.

Broadening the sales tax base is an overdue adjustment to the state’s changing economy, said Cynthia Eisenhauer, director of the Iowa Department of Management. Among the other industries that would be subject to sales tax on their services are consulting and architectural firms, computer programmers and computer design services, and tax return preparation businesses.

“Services is the fastest-growing segement of our economy, and our sales tax structure is largely based on a retail goods economy,” she said. “The idea is to form a bridge to economic growth. We’ve basically proposed amending the definition of taxable sales to reflect the new services economy.”

Revenue projections beyond fiscal year 2006 show that total sales tax receipts will go down in the long-term after temporarily increasing, Eisenhauer said.

One of the criteria Eisenhauer’s department used to choose which business services should have their sales taxed was that “the people that purchase these services are the people who are most likely to be able to afford a sales tax,” she said.

Attorneys were specifically excluded because of both state and U.S. constitutional issues related to access to legal services that the governor “chose not to interfere with,” she said.   There also was no attempt to impose sales taxes on health services or pharmaceutical companies. “The governor’s thought was that those costs are already increasing, so imposing a sales tax on those would have been inconsistent with our goals to reduce those costs,” Eisenhauer said.

Broadening the sales tax base is inappropriate, said Jim Aipperspach, president of the Iowa Association of Business and Industry, which represents about 1,500 member businesses in the state.

“Rather than increasing taxes, we need to find ways to limit the size and scope of government,” he said, “especially at a time when we’re all working so hard to grow the state’s economy. … I’d disagree that government’s done everything it can to cut expenditures.”

Eisenhauer said her agency researched the impact that extending the sales tax would have to each industry before the final selections were made. It used data from three states that have the broadest sales tax bases: Hawaii, South Dakota and New Mexico.

“We found that all three states experienced stronger economic growth than Iowa over the past three decades, and all had greater growth in financial services, insurance, real estate and services sectors overall,” she said. “And there was no evidence of impacts on small businesses from having a broader sales tax base.”

Though the majority of Snyder & Associates’ work would likely be exempt because they’re public works projects, about 30 percent of its projects would be subject to sales tax, Moeller said.

“It seems sort of at cross purposes with the governor’s initiatives to recruit new professionals to the state,” he said.

“We’re going to watch with great interest what happens.”

BUSINESS DISINCENTIVE

Iowa is not alone in its quest for new revenue sources, said Carl Tannenbaum, the chief economist of Chicago’s LaSalle Bank Corp., during a recent visit to Des Moines.

“What has happened in Iowa, as in other states, is that the slow economy is having an impact on everything from sales activity to employment activity, to the capital gains that citizens earn on their stocks, [and that] has really robbed the treasury of a lot of revenues,” he said. “And we’re looking for ways to replace those revenues without really harming the tax base.”

It’s tempting for states to consider broadening their sales tax bases rather than raising their rates, he said, because the latter move would arguably make their overall tax systems more regressive.

“That may have a nice formulaic and fairness angle, but certainly if I am running a business that will now be covered by a sales tax that wasn’t before, I won’t be happy,” Tannenbaum said. “And if I am faced with the question of whether I should locate my business in Iowa or someplace else, this would not go into the positive column.”