Taxing services
3/21/2013Gov. John Kasich’s proposal to expand Ohio’s sales tax is provoking a high degree of bipartisanship in Columbus. Unfortunately for the governor, most of it is in opposition to his plan.
The governor wants to lower the sales tax rate from 5.5 to 5 percent. At the same time, he wants to broaden the tax base to include a wide range of services: haircuts, bowling, event tickets, newspaper advertising, cable TV, tax preparation, legal representation, and a host of other things that have not been taxed before.
Mr. Kasich argues plausibly that the new tax structure would reflect the increasing importance of the service sector to Ohio’s economy. But few lawmakers or lobbyists appear convinced.
Many small businesses that would be affected fear the tax plan would chill job growth. Travel agents worry that customers would buy services online to avoid the tax, putting them at a competitive disadvantage.
Cable TV providers say their customers already are taxed in the form of a franchise fee. Newspapers argue that advertisers would switch to other media. (Block Communications Inc., which owns The Blade and Buckeye CableSystem, would face higher taxes under the plan.)
The liberal advocacy group Policy Matters Ohio says the expanded sales tax would fall disproportionately on poor Ohioans. Lawyers say they shouldn’t be taxed, because they provide essential services, similar to medical services.
Even Mr. Kasich’s fellow Republicans among legislative leaders are cool to the idea. Senate President Keith Faber (R., Celina) and House Speaker William Batchelder (R., Medina) have practically begged for other options.
There is merit, in theory, to expanding the sales tax to include more services. But the experience in states such as Florida — which broadened its tax base, then abandoned the effort as unworkable — suggests it should be done slowly and for the right reasons.
Mr. Kasich is eager to combine an expanded sales tax with higher taxes on oil and natural-gas drillers to pay for a 20-percent cut in the state income tax, and nearly a 50-percent cut for small businesses. But the nonpartisan Institute on Taxation and Economic Policy says the richest Ohioans would benefit most from this plan, while taxes would increase on the state’s poorest residents.
Before they expand the sales tax, state lawmakers should close tax loopholes and exemptions that cost the state billions of dollars in revenue every year. Revenue growth from a narrow expansion of the sales tax and higher severance taxes should be used to restore cuts in state aid that have hurt local governments and schools, not to give another tax break to people who don’t need it.
And if Governor Kasich insists on his plan to lower the state’s “high” taxes (which Zach Schiller, Policy Matters’ research director, argued in a recent Blade op-ed column are about average compared to other states), he should protect poor Ohioans from having to pay more. Services that are broadly used by low-income residents could remain exempt from sales tax. Households with incomes below certain levels could qualify for tax credits.
Mr. Kasich asked for too much too fast. Now he is in danger of getting nothing. It may be time to slow down the bus.