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· February 25, 2013

Recent history shows state efforts to tax services typically fail

The Kasich administration’s proposed expansion of the state’s sales tax to services as well as goods is not a new idea. Several states have been down this road recently, including Ohio. The results of those efforts have been consistent: taxing services is so unpopular — both among consumers and businesses — that every attempt in the past four decades has been undone before taking effect or shortly thereafter. We looked at three such examples.
  • Ohio: In 2003, then Gov. Bob Taft attempted to significantly expand the sales tax base to previously exempt services in order to offset limits on money flowing to local governments. But business interests claimed the expansion was an attack on small business and a whopping 70 percent of Ohioans disapproved of the plan.In the end, Gov. Taft signed a budget that expanded the tax to only a small list of services.
  • Michigan: In 2007, Michigan expanded its sales tax on services in order to raise revenue needed to close a $800 million deficit. The tax was estimated to cost a family of four making $57,300 a year about $65, yet two-thirds of Michiganders opposed the sales tax expansion. Businesses, too, complained about the expansion, claiming that it would hurt job creation.The sales tax expansion was repealed the same day it took effect.
  • Florida: In 1987, the state, whose Constitution prohibits the levying of an income tax, expanded its sales tax to address the need for greater revenue to serve a rapidly growing population. Major corporations including Coca-Cola, General Foods and Procter & Gamble withdrew or cut advertising efforts in the state in protest, and many citizens argued that the revenue the sales tax was intended to generate could be obtained elsewhere.The state legislature repealed the expansion just six months after its enactment.
Stiff opposition from both business and taxpayers met each instance of sales tax expansion. The Kasich administration, however, proceeds undaunted, perhaps because it needs the extra revenue the tax will generate to pay for an income tax cut that will disproportionately benefit Ohio’s wealthiest citizens. Indeed, the administration’s plan would save Ohio’s top 1 percent of wage earners more than $10,000, but would actually increase taxes on the bottom 60 percent of Ohioans. Despite this disparity, only time will tell if the administration’s proposal will confront resistance similar to that faced by the states that preceded it.

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Tagged in these Policy Areas: Ohio State Budget