To the Editor: Kasich's tax plan to face much resistance
Written by David McClough   
Wednesday, 20 February 2013 10:42
Gov. Kasich has proposed an expansion of the sales tax to offset an income tax reduction intend to stimulate small business development and economic activity.  He should anticipate much resistance from special interest groups representing service sector firms threatened by the expansion of the sales tax.  I would encourage the service sector to carefully evaluate their prospects going forward rather than react impulsively to the more immediate perceived threat.
Currently, the sales tax applies only to purchases of goods.  When the sales tax was first introduced, the economy was dominated by tangible goods, but today our economy is increasingly driven by services so the decision to expand the tax base to consumption of services seems reasonable and justifiable.  Nonetheless, service firms historically exempted from sales tax will now be burdened with the additional administrative costs associated with monitoring tax collection and payments to Columbus. This administrative burden represents a very real cost as scarce resources are diverted to serving the state taxing authority rather than running the business.  In short, the expansion of the sales tax to service firms represents an additional tax placed on service firms.  Rest assured, business owners and managers will find the most efficient means to meet the new demands of the state.  Nonetheless, let us not be na√Øve and think that the full extent of these costs will be absorbed by businesses.  Many considerations influence the final outcome, but we can be certain that some portion of the added cost will be passed along to consumers in the form of higher prices.  This result is not necessarily a bad thing.  Higher prices are not problematic, if incomes rise proportionately more.  The final verdict on the governor's tax proposal will have to wait until the income tax cut and sales tax expansion are complete and the effects have permeated the economy.  The governor's proposal is betting that the income tax cut sparks small business development, employment, and a larger tax base to offset the incremental increase in costs to services affected by the expansion of the sales tax.  If the income tax cut does indeed stimulate economic activity in the form of higher incomes and more jobs, the higher prices for services may not deter consumption as much as service sector firms might anticipate.
David McClough
Bowling Green
Assistant Professor of Economics
Ohio Northern University
 

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