If House Forgoes Sales Tax Expansion, It Will Have Big Budget Hole to Fill

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Gov. Kasich’s budget offers a net $1.4 billion tax cut over three years. It’s made up of a 20 percent cut to the personal income tax, and a 50 percent cut to taxes on business income.

Kasich proposes paying for this tax cut by broadening the sales tax base to include a host of services not currently taxed. It would be a nearly even trade-off -- $2.7 billion lost to the income tax portion in 2015 made up by about $2.7 billion in additional sales tax revenue.

Tax Commissioner Joe Testa last week acknowledged lawmakers don’t care for the sales tax expansion. But he said services represent a larger proportion of the economy than they did in the past, and the tax code should be changed to reflect that.

TESTA: "The governor’s put forward a very bold proposal, and it shakes people up, yes, because it is different, and because we’re taking a bold step to change. But we have to do this. If we don’t do this we’re going to remain non-competitive."

But Ohio conservatives continue to resist the idea. State Representative Peter Beck is a Republican and a finance committee member who also heads the Ways and Means Committee. Here’s how he explains his thinking on the plan.

BECK: “I think the sales tax expansion, on concept, is a great idea, when you’re moving from an income-tax base tax system to a consumption tax. That makes a lot of sense.”

But, Beck says, putting such a change into practice is complicated.

BECK: “How are you going to administer the program...?”

And may result in a lot of unintended consequences, he says.

BECK: “What’s the impact on business-to-business transactions? What’s the impact it’s going to have on taxing commercial rents or professional services?”

Ohio University economics professor Richard Vedder has publicly supported Kasich's tax plan. But Vedder says there's an argument to be made for resisting taxing fees for accountants and attorneys, and other services a business might buy.

VEDDER: “Very small businesses have to go out and contract those services from outside law firms and so forth. And they would be subject to the tax. A large business might have in-house attorneys.”

And they wouldn’t have to pay a sales tax for services like legal work or accounting if their own employees are the ones providing those services.

If Ohio’s not going to follow through on the sales tax plan, Vedder’s got a few other ideas for plugging that multibillion-dollar hole. Selling off state assets is one. Another is keeping the sales tax rate the same rather than cutting it by half a percentage point, as Kasich proposes as part of his plan.

VEDDER: “Indeed, they could go so far as to propose a half-percent increase in the sales tax.”

Lawmakers likely will propose ideas of their own this week. Peter Beck, the Ways and Means Chairman, says one idea being considered is eliminating a number of tax credits.

BECK: “The campaign contribution credit, the pre-1972 trust exemptions…the gambling deduction that’s available.”

But the governor’s budget shows those three exemptions adding up to only $46.7 million in lost revenue -- a long road from the nearly $2.7 billion expected from the sales tax expansion. .

Beck says, business growth over the next few years could also yield more revenue, and he suggested using money from the surplus.

With Republicans firmly in Control of both the House and Senate, Democrats don’t have much say in the process.

But they’re critical of the budget on several fronts. They say the sales tax is too regressive, saying it falls more heavily on lower-income and middle-income Ohioans. They question whether an income tax cut really promotes economic growth. And any surplus, they say, should be given back to local governments and schools that took heavy cuts in the current budget cycle.

The House opens another round of hearings on the next two-year budget later today.

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