Sharon Coolidge reports:
Gov. John Kasich’s tax plan would result in a three-year windfall for counties thanks to expanding the sales tax to services, but the state would take over counties’ rates to prevent too big a boon.
Under the plan – which requires approval by the Legislature – counties are guaranteed increased revenue for three years starting with fiscal 2014, which begins July 1.
They’ll get at least a 10 percent bump in revenue in the first 19 months under the new plan, compared with collections over the next few months.
Over the rest of the three-year period, the state promises counties at least a 15 percent bump in revenue, Gary Gudmundson, spokesman for the Ohio Department of Taxation, told The Enquirer.
In Hamilton County, that would reduce the deficit in the fund for Cincinnati’s two professional sports stadiums, which are supported now with a voter-approved half-cent sales tax.
That tax is falling short of revenue needed, resulting in a projected deficit of about $30 million in future years.
Kasich’s plan would add at least $6.5 million a year to the fund. Coupled with $5 million from Ohio casino revenues, the deficit shrinks to a more manageable number.
“That is not insignificant,” said Hamilton County Budget Supervisor John Bruggen. “Of course, we’re a long way from getting from a proposal to it actually happening.”
It’s unclear what would happen to the stadium-dedicated sales tax at the end of the three-year period, since it was based on the old taxation system.
The tax on services is part of a broader plan that Kasich says will generate jobs and growth. It reduces the sales tax rate, but broadens what is taxed to include services currently exempt.
Officials with the Department of Taxation said Tuesday they were still working on the list of services that would be taxed. They included everything from legal fees to sports and concert tickets to haircuts and museum admission.
The $4.5 billion that would raised by the expanded sales tax would help offset a 50 percent income tax cut for small businesses and 20 percent income tax cut for individuals.
Here’s how Kasich’s sales tax plan would work: Currently, for every dollar spent, a 5.5 percent state tax is added. Counties are permitted to add sales taxes of their own.
Under the proposal, the state portion drops to 5 percent.
The state would seize control of local sales tax rates for three years. Beginning in July 2013, local rates would be cut, varying by county, depending on the value of services offered.
“Big metro counties with all kinds of professional services stand to generate a lot more money than rural counties,” Gudmundson said.
Left alone, local sales tax rates would result in an average 30 percent more in collections after services are taxed, according to the Department of Taxation.
The department projects cutting Hamilton County’s sales tax rate initially from 6.5 percent to 5.65 percent.
The department did not provide estimates for Clermont, Butler and Warren counties. The state would recalculate rates as actual collections came in. In July 2016, counties would regain control of how much sales tax is collected.
Gudmundson said the three-year period was chosen to allow enough time to get reliable data about local collections under the new system. Hamilton County now collects $131 million a year in taxes.
Sukie Scheetz, Clermont County’s budget director, was combing through the proposed plan Tuesday.
The likely revenue increase “is probably more than I can expect without any change” in the tax, she said. “So that would be a positive for the years they are going to guarantee it.”
If Kasich’s plan is adopted, Ohio would become one of few states with such a broad sales tax base. Hawaii, New Mexico and South Dakota tax services, said Tracy Gordon, a fellow in economic studies at the Brookings Institution, a Washington, D.C.-based public policy research organization.
In recent years, efforts to tax services in Maryland and Florida failed, Gordon said.
Kim Rueben, an economist and a senior fellow at the Tax Policy Center in Washington, said sales tax expansions often don’t raise the money states expect because projections prove too optimistic, in large part because businesses fight back and get exemptions.
Kasich anticipated that when he announced his budget Monday and vowed to fight “special interests” seeking to exempt certain industries.
But businesses sometimes raise strong arguments, Rueben said. For example, some argue that taxing accounting services is unfair to small businesses because they hire out for the service and must pay the tax, while big corporations escape the tax because they have in-house accountants.
“Other states have run into difficulty because of this disparity,” Rueben said.
Staff writer Dan Horn contributed.