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Ohio House kills Kasich tax plan, but Senate may have other ideas

Even though Governor John Kasich's plan to increase business taxes, including levying the state sales tax on engineering services, was rejected by the Ohio House of Representatives last week, he clearly intends to try to resuscitate the plan in the Ohio Senate.

The Republican-controlled House voted overwhelming on April 22 to pass a two-year, $72 billion state general fund budget bill that included virtually none of the GOP governor's so-called "tax reform" concepts.

In order to accomplish a 23 percent reduction in the state personal income tax over the next two years, Kasich had asked the General Assembly to increase the rate of the Commercial Activity Tax from 0.26 to 0.32 percent of company gross receipts. 

He proposed that the state sales tax be increased by half a percent, to 6.25 percent, and that the sales tax be collected on an array of services, including "management consulting," a term so broadly defined that it would certainly cover many services provided by engineering firms.

The budget bill approved by the House includes a 6.3 percent across-the-board reduction in personal income tax rates but omits all other tax changes sought by the administration.

This is the second budget cycle in a row in which Kasich has tried to persuade legislators to approve a major cut in state income tax rates in return for increases in "consumption taxes."  Two years ago he proposed that the sales tax base be broadened to cover all services, but the idea was rejected in the House then, as well.

ACEC Ohio testified against this latest plan twice in the House and worked with a large coalition of business groups to defeat the tax package, which never gained traction with legislators on either side of the aisle in the House.

While the administration contended that lowering personal income tax rates would boost Ohio's economy and spur job creation, few lawmakers were convinced.

In testimony to the House Finance Committee on March 25, ACEC Ohio Executive Director Don Mader said, "Since this budget proposal was introduced, I’ve had the opportunity to talk with many of my members about it, and not a single one has told me that a reduction in their personal income tax liability would prompt their company to hire even a single new employee.

"There simply is no correlation between an engineering company owner’s personal income tax rate and his or her company’s ability to hire staff," he said.

Of this latest setback, a spokesman for Kasich said, "the rejection of tax reform is a missed opportunity that, if allowed to remain, would erode our improving economic climate."

While leaders of the Republican-controlled Ohio Senate have previously expressed opposition to expanding the state sales tax to services, it is not inconceivable that some elements of the governor's tax plan could find their way back into the Senate's version of the budget, which would set the stage for what could be a contentious conference committee.

Senate President Keith Faber said he asked Senate Ways & Means Chairman Sen. Bob Peterson (R-Sabina) to consider all of the governor's tax proposals along with the House's version.

"I have instructed Bob to put everything on the table – all of the governor's proposals, all of the tax expenditures, all of the changes we'd like to see, and let's see what we can do," he said. "If we can't get it done, I think the proposal that's in the House to start a tax reform commission is a good idea."

Faber said he generally agrees with Gov. Kasich's effort to shift from income to consumption-based taxes.  "However, we also need to make sure we understand the unintended consequences, and when you make tax shifts there are always unintended consequences," he said, adding that the House's concerns about how the Department of Taxation would administer the governor's tax policies appear "logical."



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