In his proposed 2010-11 budget, Gov. Ed Rendell is calling for a reduction in the state sales tax from 6 percent to 4 percent, while expanding it to 74 previously excluded goods and services. A reduced sales tax may sound good, but the expansion of the tax base would ultimately place a greater burden on Pennsylvania businesses and consumers.

"This isn't sound tax policy," said Gene Barr, PA Chamber vice president of government and public affairs. "A sales tax should be applied to the final consumption of goods and services, not at multiple points along the production process."

By taxing services such as accounting, advertising and even warehouse storage, businesses would be taxed multiple times as they move goods and services from production to final retail sale. Exempting business purchases prevents double taxation, or "pyramiding" as it's also known.

The multiple taxing layers the administration proposes would only increase the level of pyramiding within the system, leading to a greater share of the sales tax burden falling on job creators. To offset this additional burden, companies would be forced to either pass the new sales tax costs on to the consumer or reduce their economic activity in Pennsylvania in order to remain competitive.

"The sales tax is coming out of small businesses more than large businesses; small businesses who have to buy services like accounting and legal services," noted former PA Chamber Board Chairman and Irex Corp. President and CEO Kirk Liddell in a recent Central Penn Business Journal article. "A company our size doesn't have to buy those services, we have them in-house."

The expansion of the sales tax may discourage companies from purchasing these services at all. Some companies may choose to self-provide business services to avoid the tax, rather than purchase them from a more efficient provider.

To add insult to injury, the Rendell sales tax proposal would eliminate the 1 percent vendor discount – a benefit that businesses receive for essentially serving as the state's tax collector. This discount helps to offset the administrative costs of collecting sales tax and remitting it to the state.

Essentially, the Rendell administration wants to take away the financial incentive for collecting sales tax and now tax the business services companies need to purchase in order to do so.

The additional revenue collected through the expansion of the sales tax (estimated at $531 million in FY 2011 and nearly $900 million in FY 2012) would be used to offset the loss of federal stimulus money and to fund a reserve account for public pension obligations.

According to a Tax Foundation study, Pennsylvania is one of the states that last year used one-time stimulus money to backfill their budgets, postponing meaningful steps to prioritize public expenditures.

"The stimulus was a survival strategy," Barr said. "Replacing that infusion with permanent taxes will put a drag on the state economy."

And to ask job creators to bear the brunt of the financial obligations facing a public pension system that offers benefits far surpassing those offered by many private-sector employers is simply unfair.

The PA Chamber and its members acknowledge the severity of budget shortfalls and the impending pension funding crisis, but an expansion of the sales tax base is not the answer. Short-term solutions are unavoidable, but long-term systemic changes need to be made to address the underlying problems.

Click here to read to PA Chamber's recent letter to state lawmakers in which it outlined members' concerns with the sales tax proposal.