Gov. John Kasich wants consumers to start paying sales tax on a huge array of services that traditionally have been exempt in Ohio.
Those services touch the lives of every state resident and include everything from cable television to funerals to attorney fees to haircuts to pet grooming.
The controversial plan, which needs legislative approval and will face significant opposition, is part of the governor’s overall effort to rewrite the tax code. It was unveiled this week in his $63.1 billion two-year budget proposal.
The sales tax effort is designed to take advantage of the state moving to a service economy, officials said. It’s coupled with a proposal to lower the income tax by 20 percent over the next three years and to cut the tax rate on virtually all small businesses by 50 percent.
Economists believe “and can demonstrate that a consumption-based tax system is more conducive to job creation than one that relies more heavily on an income tax base,” said Gary Gudmundson, spokesman for the Ohio Department of Taxation. “The point of this reform is to create jobs. To create an environment in Ohio that is friendly to job creation.”
Under the proposal, consumers and businesses would pay nearly $2 billion more a year in state and local sales taxes by 2015. But officials said Ohioans would actually save $1.4 billion in taxes overall thanks to larger cuts in income taxes and other tax programs.
Economists and policy analysts would agree that expanding the sales tax base is a positive move for the state, said Don Boyd, a senior fellow with the Rockefeller Institute of Government in Albany, N.Y.
“Ohio is on the low end on what it taxes, meaning that it taxes fewer services and tends to capture a smaller share of its economy than other states in general,” he said.
But he also predicts the proposal will face a difficult road. It will provoke an outcry from professionals such as architects, lawyers and accountants. Others will complain that it’s a regressive tax that hits lower-income pocketbooks harder. And there will be arguments that it would be too difficult to tax services performed by attorneys and other professionals.
Such broad-based efforts in other states such as Florida have ended in miserable failure, Boyd said.
Kasich spokesman Rob Nichols defended the effort.
“Change is never easy,” he said. “When you’re talking about job creation, just because something is difficult you don’t back away from it.”
Expanding the sales tax to more services also would level the playing field for businesses in the state, officials said. Some industries, such as landscaping, carpet cleaning and tanning parlors, already pay sales tax while others don’t.
The state estimated that the largest chunk of new revenue — $661 million in 2015 — would come from the architectural, engineering, design, marketing, management consulting, advertising, scientific research and lobbying industries.
The second largest amount — $584 million — would be from the financial, insurance and real estate industries.
The tax is designed to target businesses using those services and higher-income individuals, Gudmundson said.
But the sales tax expansion would affect more than just business-to-business services and the wealthy. It extends to attendance at cultural events, sporting events, amusement parks, fairs, book and movie downloads, magazine subscriptions, tax return preparations, dating services and even debt counseling.
Many services would remain exempt, including adult and child day care, health care, residential trash pickup, utilities and property construction.
The details
While extending the sales tax to more services, the plan involves lowering the state’s 5.5 percent share to 5 percent.
The state also would lower the sales tax rate for individual counties and transit groups, and freeze the amount for three years. The reduction would vary by county.
For example in Summit County, the county rate and the Metro Regional Transit Authority rate would both decline from 0.5 percent to 0.35 percent. That would result in an overall 5.7 percent rate in Summit, down from 6.5 percent.
Meanwhile, Medina County would see its rate go from 1 percent to 0.8 percent.
Despite the reductions, state leaders predict the sales tax would generate between 10 percent and 30 percent more revenue each year by covering more services. A 10 percent increase in Summit would have meant $3.7 million more for the county last year.
The state administration estimates that the change would generate $1.77 billion more for the state by 2015 and at least another $193 million for counties and transit authorities.
Medina County school districts also would benefit. County voters approved an unusual 30-year, 0.5 percent increase to the sales tax in 2007 to provide extra revenue to schools.
Their share would go up just like the county’s, officials said.
Kasich has guaranteed counties that they would receive at least 10 percent more revenue or the state will step in and pay the difference.
Questions
But big questions remain, and there’s skepticism about whether the proposal will be approved by the Republican-controlled legislature.
“It’s creative,” said Brian Nelsen, budget and finance director for Summit County. “I give [Kasich] credit for that. Just whether or not it flies remains to be seen.”
He and others wondered how the state legislature could lower county rates, especially where rates have been approved by voters, and questioned the loss of local control.
State Sen. Tom Sawyer, D-Akron, is skeptical about whether there’s enough support, even among Republicans, to approve the sales tax proposal as presented.
“This is an extreme widening of services that he applies the sales tax to,” said Sawyer, who has been in politics since 1977. “It’s beyond anything that anyone in Ohio has talked about in my political lifetime. I frankly think he’ll have great difficulty selling this to Republicans as well as Democrats.”
State Rep. Ron Amstutz, R-Wooster, chairman of the House Finance and Appropriations Committee, said there are plenty of “unanswered questions” but the tax package is big enough that “we have something to work with there.”
“It’s an expansive proposal and I’m sure we’re going to hear a lot of discussion about how it might play out,” he said.
Amstutz added that he expects opposition.
The Ohio Society of CPAs has already sent an email to members saying it will fight extending the sales tax to its industry. “OSCPA has had a longstanding position of opposing a sales tax on accounting and other services,” the email says. “Rest assured, we will proactively engage in discussions with the administration on this proposal as the budget process proceeds.”
Scott Mason, of Adams-Mason Funeral Home in Akron and a member of the Ohio Funeral Directors Association board of directors, said the association is aware of the proposed change and is hopeful the industry will be excluded.
“I’m sure all industries are saying don’t do it to us,” he said. “Traditional funeral homes are relying and hopeful that families still choose to have full types of services. That may be just another roadblock for those people who maybe want that but can’t truly afford it.
“I think we all understand that things need to be paid for and budgets need to be balanced but hopefully there are some other avenues that the state can consider as opposed to charging people at a time of loss any extra.”
Mixed reaction
Not all the reaction was negative.
John Begala, executive director of the nonprofit Center for Community Solutions in Cleveland and a former Democratic state representative, supports the effort. The center is a health, social, economic policy and research group.
“We are pleased to see the ideas ... on the sales tax and recognizing the movement to the service economy,” he said. “We think that is progress.
“On the whole, given that he is a fairly conservative governor, the approach he has taken on this budget basically gets at his big underlying issues, jobs and growing the economy while also providing for people’s basic needs ... This strikes a balance,” he added.
But several Akron-area business owners weren’t thrilled to hear about the sales tax proposal and worry how their customers will respond.
“Unbelievable,” said Laura Panaia, owner of the Halo Salon & Spa in Cuyahoga Falls. “I didn’t hear about this one yet. Things are already taxed here like manicures and facials.
“That’s ridiculous. It’s terrible, maddening. ... It won’t kill our business, but it will take a chunk out of it.”
Adam Carney, manager at AMF Riviera Lanes in Fairlawn, said the bowling alley already builds the tax into its price for customers. He said he’s not sure whether the company would increase its prices or just eat the difference.
Bowling is $3.45 a game during the day.
“That’s a shame for families because you come out and try to get a value on something and then to tax it when you are trying to have a little fun with the family? That’s no good,” Carney said.
Toni Petit, owner of Posh Pooch Dog Grooming in Springfield Township, said she would probably not pass on a sales tax increase.
Petit, who has one employee working for her, said she grooms about 10 dogs a day at an average price of about $35 per animal.
“I’ll probably have to eat the tax,” she said. “You can only charge so much, so I guess the only one it will affect is me.”
Rick Armon can be reached at 330-996-3569 or rarmon@thebeaconjournal.com. Marilyn Miller can be reached at 330-996-3098 or mmiller@thebeaconjournal.com. Staff writer Kathy Antoniotti contributed to this article.