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Aim is to reduce budget deficit
By Spencer Hunt and Shelley Davis
Cincinnati Enquirer Columbus Bureau
COLUMBUS - Gov. Bob Taft on Thursday called for a $2.3 billion tax increase that would add scores of everyday services and purchases to the state sales tax, raise business taxes and change income tax rates for thousands of Ohioans.
Saying more money is desperately needed to crack a huge budget deficit over the next two years, the governor outlined a proposal that would slap the sales tax on, among other things, real estate commissions, cable TV, used car trade-ins, amusement park tickets, dry cleaning, landscaping, tanning beds, massages - even tattoos. He also wants out-of-state residents who work in Ohio to pay Ohio income taxes.
The proposal, which must first be approved by lawmakers, is the most sweeping tax proposal in decades and would touch nearly every Ohioan.
"We face a dire budget situation in Ohio," Taft said. "We are seeking additional tax revenues as a last resort."
While tax experts praised the governor for trying to reform Ohio's aging tax codes, they also said that Taft faces an uphill battle to win the support of his fellow Republican lawmakers in the General Assembly.
"I must say he's created a tremendous public relations challenge," said Rick Yocum, president of the nonpartisan watchdog group, the Ohio Public Expenditure Council. "There is something in there for just about everyone to dislike."
"It's all dependent on how much money we have to make up," White said. "I'd hate to unleash that on the citizens of Ohio, but if the hole is $4 billion, we will have to do something."
Taft has already called for tax increases on cigarettes, alcohol, gasoline and drivers licenses. He has cut $1 billion from the budget in 27 months.
Ohio's current $44 billion budget was left crippled by the national recession, which sent income, sales and business tax revenues plummeting. Other states are experiencing similar problems.
Taft said his new two-year budget, which he will unveil Monday, is in even worse shape because the economy has yet to recover and the state's $1 billion rainy day fund is gone. The costs of Medicaid, the federal-state health insurance plan for the poor and elderly, also continue to climb.
Though some estimates put the two-year deficit at $4 billion, Taft said he will share his calculation Monday.
His plan to raise $2.3 billion over the next two years would include:
Collecting $1.3 billion by adding 22 new services and products to the state's 5 percent sales tax. Some counties, including Hamilton County, charge an additional 1 percent.
Changing corporate tax laws and eliminating more than 20 tax credits and exemptions to raise $777 million from Ohio corporations. Taft said Ohio's state and local corporate taxes on income equaled $67 per capita, while the national average was $124 per capita.
Raising $115 million in personal income tax revenues through a permanent tax on financial trusts and by forcing out-of-state residents who work in Ohio to pay Ohio income taxes.
The plan also calls for changes in the tax code that would save Ohio families and businesses money.
Up to 600,000 low-income individuals, families and seniors would no longer have to pay state income taxes. The 7.5 percent tax rate paid by Ohioans who earn $200,000 or more would also be lowered to 6.9 percent over a four-year period. All Ohioans who earn less than $100,000 a year would see the income tax rates for their brackets drop slightly.
Businesses would see corporate franchise tax rates drop from 8.5 percent to 7 percent over a three-year period.
There's one big problem: None of these changes would take effect within the next two years.
The proposal would also delay for six years a new law that would have adjusted Ohio's income tax brackets to match the rate of inflation.
Tax Commissioner Thomas Zaino said the need to fill the upcoming budget deficit was one big reason for delaying changes to the tax rates.
That earned some criticism from Scott Pullins, chairman of the Ohio Taxpayers Association.
"He may give some money back on one hand, but take it away with the other hand by taxing cable services and everything else under the sun," Pullins said.
One more immediate proposed change in the income tax code could provide a big headache for Northern Kentucky residents who work in Ohio. Taft's plan would force these residents to pay Ohio income taxes.
Zaino said Ohio would make an extra $17.9 million each year off this change because more out-of-state residents work in Ohio compared with Ohioans who work in other states.
Kentucky residents would be able to credit their Ohio income taxes paid against their Kentucky income taxes.
Taft and Zaino said the sales tax was added to services that can't easily be moved out of the state and on things most Ohioans don't have to have.
"Everyone needs a haircut," Zaino said. "So that's not taxed."
Most do need a car, and sales taxes Ohioans pay to buy new or used cars would increase substantially. The governor's plan would reduce the used car trade-in allowance by half for tax purposes.
In Hamilton County, a new car buyer with a $2,000 trade-in would pay an extra $60 in state and county sales taxes.
"I ain't happy," said Ace Ammann, executive vice president of the Greater Cincinnati Auto Dealers Association.
"The car dealers down here, quite frankly, think one of the bright spots in the economy has been the auto industry," Ammann said. "And now Taft is taking target at that."
Not even newspapers and magazines are left out of the plan, which would subject publications published at least bi-weekly to the sales tax.
The increased price would have a negative impact on the newspaper business, which is already hurting from a decline in advertising sales, said Frank Deaner, executive director of the Ohio Newspaper Association.
"It would be a shame if Ohioans end up being taxed for trying to be well-informed," he said.
Business leaders will also fight the governor over changes to Ohio's corporate tax laws.
Several changes target corporations that, according to Taft and Zaino, use sophisticated accounting practices to avoid paying "their fair share" of state taxes.
In one such scenario corporations can deduct large portions of their Ohio income taxes as royalty fees paid to an out-of-state subsidiary. That practice and others would end under the governor's proposal.
Dan Navin, a lobbyist for the Ohio Chamber of Commerce, said businesses are skeptical that the governor and lawmakers will follow through and lower corporate tax rates years later.
"Several conservative lawmakers say more cuts, not new taxes, are needed to balance the budget.
"Since the State of the State (speech) it's been a tax a day; beer, wine, cigarettes, and now cable TV," said Rep. Tom Brinkman Jr., R-Mount Lookout.
IF YOU GO
Personal income tax: $79.6 million
Make income tax on trusts permanent. Reduce individual tax rates beginning July 2005. More than 500,000 of the lowest-income households would pay no tax.
Reciprocal taxes: $35.8 million
Make Ohio residents who work out of state subject to income tax in the state where they work and make nonresidents who work in Ohio subject to Ohio tax.
Sales taxes: $1.264 billion
Expand sales tax to services, including real estate, lobbying, cable TV, dry cleaning, amusement park admissions, debt collection and many others.
Corporate franchise taxes: $777.3 million
Lower corporate franchise tax rates from 8.5 percent to 7 percent over three years while eliminating loopholes that reduce what Ohio corporations pay.
INCOME TAX REFORM
• Make permanent the income tax on trusts. Senate Bill 261 subjected the income of trusts to the income tax only through 2004. Before that Ohio was the only state with a broad-based income tax that did not apply to trusts.
• The income tax proposal reduces all state income tax rates over four years: In tax year 2005, all but the highest two tax rates are reduced by rounding them down to the nearest 0.1 percent. The top income tax rate of 7.5 percent is phased down to 6.9 percent beginning in tax year 2006 and ending in tax year 2008. In tax year 2006, the current personal exemptions and $20 credits are eliminated in favor of a universal credit per return of $105 ($210 for married taxpayers) and an additional credit of $80 per dependent.
• In tax year 2006, the brackets of the joint filer credit are adjusted upward (from $50,000 and $75,000 to $60,000 and $85,000).
• In tax year 2007, these credits become indexed to inflation.
• Changes to Ohio's personal income tax system has the following impacts:
• No taxpayer with Ohio Adjusted Gross Income under $10,000 will pay income tax, and 550,000-600,000 low-income taxpayers will no longer have any tax liability.
• The highest percentage tax cuts go to the lowest income taxpayers, especially low-income seniors, 95 percent of whom will get relief.
• More than 97 percent of single-parent households currently with tax liability get relief.
SALES TAX PROPOSALS
Sales tax proposals Gov. Bob Taft is proposing the following services be subject to state sales tax. Estimated revenue over two years, beginning July 1.
• Professional entertainment and sporting events, theaters, concerts, movies, amusement parks, $101.8 million.
• Personal storage and parking facilities, $45.6 million.
• Tanning, tattooing, nail care, skin care, and spa services, $4.2 million.
• Cable TV, satellite and pay-per-view, $158.2 million.
• Lobbying, public relations services, $19.7 million.
• Interior and landscape design, $16.9 million.
• Dry cleaning and laundry, $31.2 million. • Real estate commissions, $116.8 million.
• Real estate title search, $19.6 million.
• Real estate management, $58.5 million.
• Replace WATS and 800 exemption with a call-center exemption, $103.7 million.
• Delivery charges, $12.2 million.
• Taxis, limos, and charters, $10 million.
• Debt collection, $36.8 million.
• Vehicle trade-in allowance, $141.9 million.
• Newspapers, $31 million.
• Local telephone service, $161.8 million.
• Magazine subscriptions, $25.2 million.
E-mail shunt@enquirer.com