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Service tax would hurt small businesses


According to recent reports, Gov. Tom Vilsack will recommend to the 2005 Iowa Legislature that the sales tax base be expanded by eliminating the current exemptions for a number of professional services, including those performed by certified public accountants. In addition to expanding the sales tax base, the governor wants to eliminate the deductibility of federal income taxes on state returns, eliminate or reduce state taxes on pension and Social Security income, and increase the state earned income tax credit for low-income citizens.

I feel strongly that an expanded sales tax could have a negative impact on Iowans, especially Iowa business people.

This sales tax proposal is a direct and regressive tax on individuals, consumers and business owners who use professional services. Increased costs to consumers could result in job losses within the state if a tax on professional services causes demand for those services to decrease. Also, the tax may have a poor cost/benefit ratio. Additional administration, more tax collectors, more rules, more forms and more litigation would likely result.

A tax on professional services would create an advantage for big businesses that obtain these services in-house, making it anti-small business. Smaller, new and marginal businesses can least afford, and would be hardest hit by, the added tax burden. Start-up businesses have an especially great need for professional services. Increasing the cost of tax preparation services would encourage those who have the least ability to pay for those services to prepare their own tax returns. This will lead to errors and increased administrative costs to correct those errors. In addition, the taxpayers who need the assistance most could end up missing out on some tax breaks, causing them to overpay both the federal and state governments.

By applying sales tax to professional service industries, we would be sending a message to providers of those services located outside the state to stay away from Iowa. Our professional and business communities would be placed at a competitive disadvantage to out-of-state businesses. It might discourage those now in Iowa from remaining here. In addition, a tax of this nature would have a negative effect on companies seeking to relocate to, or expand in, our state. High-technology and service companies are very mobile and are the fastest-growing segment of the economy; a service tax might deter these companies from locating or expanding in the state, impeding the development of the largest portion of potential new and expanding businesses.

A tax on professional services also would create an incentive for larger businesses not to contract out services to Iowa professionals because of the additional cost of the tax. This tax would significantly increase the cost of doing business in Iowa. Businesses could avoid the proposed tax by moving the taxable transaction to a state without a tax. If that happens, the state would get less revenues from taxing professional services than expected. Almost all businesses must use professional services to some extent, and Iowa already taxes more services than most states. When businesses seek these services in another state, jobs are lost in Iowa, with a resulting loss of the tax revenue now generated by people providing these services.

I strongly encourage our governor and the Legislature to reconsider this proposal and conclude that a tax on professional services is not a means to stimulate the growth our state needs and deserves.

Jeff Bartling is managing partner at LWBJ LLP, an accounting firm in West Des Moines.

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