When John Kasich highlights the tax reform in his two-year, $63 billion budget proposal, he largely has in mind the changes to the state sales tax. The governor wants to apply a sound rule of tax reform: broaden the base, and lower the rate. He calls for the tax to cover a much wider range of services, reflecting changes in the landscape of the economy. He proposes lowering the rate from 5.5 percent to 5 percent.
So far, so good.
Trouble begins to brew in the details. Hard for a county official to miss the diverging treatment. The state gets to collect all the additional revenue due to the broader base, roughly $3 billion for the biennium. The added revenue is a crucial component in covering the cost of the governor’s proposed 20 percent reduction in income tax rates.
Would counties enjoy a similar windfall? Not according to the governor’s plan. The state would take charge of local piggyback sales taxes, Summit County, for instance, with an added 0.5 percent for public transportation. The governor proposes adjusting the local tax to limit the new revenue, first to 10 percent, then 15 percent. That transit levy in Summit would likely be reset at 0.35 percent.
After three years, the state would return control of the local piggyback tax to counties.
Ask Bob Taft about the challenge in extending the sales tax to services. He met fierce resistance at the Statehouse. John Kasich can expect the same. In many cases, the complaints will prove hollow, self-serving, more than anything else. Yet there are legitimate areas for lawmakers to voice concern, in particular, business-to-business sales.
Other states that have traveled this road have tended to steer away from levying the sales tax on such transactions. They have worried about competitive disadvantages and distortions to the market. More, there is a risk of problematic “tax pyramiding,” the actual tax much higher than the amount paid by consumers at the point of sale, aggravating the regressive aspect of the sales tax.
The governor insists that his package of tax changes is all about promoting economic development and job creation. There is much merit in broadening the sales tax base. What Ohio doesn’t need is an expansion that risks making it more difficult to do business in the state.