On Friday, Keith Faber and William Batchelder, the House speaker, all but declared dead the governor’s proposed expansion of the state sales tax. In their joint statement, the Ohio Senate president and House speaker pleaded for help, or ideas about how to raise revenue in other ways to make affordable a proposed 20 percent reduction in individual income tax rates.
Recall the budget plan that John Kasich unveiled early last month. It featured interrelated parts, an increased severance tax on oil and gas drilling, the expanded sales tax (with a slightly lower rate) and the income tax cut, delivering in all a nearly $900 billion reduction in the tax burden for the biennium. Fiddle in a small way, and the package begins to unravel. Do so in a big way, as many Republicans at the Statehouse wish, abandoning the sales tax element and the higher severance tax, and the challenge becomes immense.
The governor deserves credit for the concept behind the sales tax expansion, broadening the base to reflect a changing economy, moving from goods to more services. Applying the sales tax to a wide range of services brings a measure of fairness. It also opens the way to lower rates, or at least puts off rate increases. The challenge resides in how best to move forward. Florida and Michigan attempted such sweeping change, and then retreated, realizing they had gone for too much.
Kasich now finds himself in a similar place. The legislative process has revealed that the governor and his team did not weigh fully enough the consequences, critics exposing weaknesses and posing questions still without clear answers.
Thomas Zaino, a former state tax commissioner under Bob Taft, presented a devastating critique. He showed how the taxing of many services would have a pyramiding effect for businesses and their customers, adding to costs, making companies less competitive. He noted that in some instances, businesses would pay the tax to the state before they were paid by the service provider.
The Ohio State Bar Association has argued persuasively that applying the tax to legal services conflicts with the principle of access to the courts. Engineers, architects, auto dealers, Realtors, even fair managers, among many others, have highlighted the complications that did not receive adequate attention in the crafting.
These concerns are not the usual griping of those about to face a new tax. Rather, economists long have warned if a state wants to extend the sales tax to services, it must do so with care. That helps to explain why most states, including Ohio, have taken an incremental approach. More, it is why they largely have stayed away from applying the tax to business-to-business sales.
If state Sen. Faber and Speaker Batchelder are looking for alternatives, they would do well to examine those services purchased by households, or households and businesses, adding logically to the steps the state already has taken. Or they might look at the $8 billion a year in tax expenditures, the assorted exemptions, deductions, exclusions and credits. The commercial activity tax on gross business receipts, with its broad base and low rate, still does not raise the revenue originally intended.
Or maybe they could just say no to an income tax cut, rates already reduced 21 percent since 2005? What is plain is that the governor’s sales tax expansion has flopped, the trouble coming not in the concept but in the execution.