Guest Post by Luke Brockmeier

Kasich’s tax reform seems like a terrible idea for Cincinnati (and for Toledo, Youngstown, Marietta, and any other multi-state metro area). I mean, I don’t get it–how is a 5% small business tax hike offset by a tax cut of 3% (at best)?

I’m going to avoid macroeconomics here.*

He wants a 5% tax on services (including business-to-business services such as graphic design, web design, and advertising) when the transaction takes place in Ohio.   So why won’t all of the graphic designers, web designers, and advertising firms move to Kentucky?

I… don’t know.   Does Kasich know? Or has he not seen the numbers?

The 3 states that he’s emulating are Hawaii, New Mexico, and South Dakota. Notice a pattern? None of those states have border towns!**

This reform would seem to be worst for small businesses in Republican-represented suburbs in Cincinnati, as their firms would be greatly incentivized to move a few exits down I-275 and save 5% on all transactions.

There are offsets, of course. You save 0.7% on your income tax if you earn $40,000. Or, if you do graphic design on the side, you save a whopping 0.12%. Plus, you’ll now have to file a sales tax return (because small government!) which will probably require an accountant. Oh, and you’ll now pay a 5% tax on that accountant.***

The S corporation tax deduction (50%) is sizable, but dependent entirely on the profitability of the S corporation and not applicable to the actual small firms in Cincinnati that do (say) advertising for Proctor and Gamble (and tend to be C corporations).

Let’s take a freelance graphic designer who makes $40,000 a year. Currently, she pays $1408 in income taxes. Under Kasich’s proposal, she’d only pay income taxes on half of that income, or $470. However, her business would be taxed at 5%, meaning–if it’s pure profit–she’s paying an extra $2000 a year in sales taxes.

That’s a tax hike of over a thousand dollars.

And she now gets to file a bunch of awesome small-government tax returns. Or she could save a thousand dollars, avoid hiring an accountant entirely, and move to Kentucky–an option that Hawaiians, South Dakotans, and New Mexicans don’t have.

I’m happy to be proven wrong on this, but it seems like a 5% tax hike on service businesses is going to outweigh a 2.5% tax cut, and those businesses will just move across the river.

This seems like a massive tax cut for investment bankers and wackadoodle California venture capitalists, and a massive tax increase for absolutely everybody else. How does a suburban Republican support this?

————-

* OK, one macro point.  Kasich says (in flowery ideology to rival Engels) that the tax deduction for pass-through entities will spur hiring.  That’s a fantastic load of horse shit.  If you’re a software designer, you hire people because you have too many clients to handle everything yourself.

Kasich is saying that since you’re now personally richer, you’ll hire an assistant at your unprofitable business.  Presumably because you don’t want to keep the extra money?

That he isn’t laughed out of town by newspapers is testament to the fact that being a successful reporter means you probably have never worked in another industry.

** South Dakota technically has two multi-state CSAs (Sioux Falls, and Sioux City) but they aren’t comparable.  The downtown of each is about 30 minutes from the border, and there’s no infrastructure on the opposite side of the border.  That is, you can’t move across town and avoid the sales tax.

*** Psych!  You’ll just stop doing graphic design.  John Kasich, hobbykiller.

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Luke Brockmeier is a former organizer with America Votes and Planned Parenthood Southwest Ohio Region. He ran for State Representative and is currently doing freelance work in Cincinnati.

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  • Unconscious Conscience

    Yes indeed. Fleeing high-tax regions for lower taxes somewhere else is Republican dogma. Mitt Romney made a fortune off-shoring commerce to China.

    Further, all those people who migrate out of state or simply domicile their small business OOS to avoid John-Boy’s massive tax hikes on them will also patronize businesses in the lower tax states. Try shopping for clothing in Pennsylvania – NO sales Tax, quite different than the retailers within Ohio near the Ohio-Pennsylvania border. Gas taxes and a myriad of Kasich’s other small-business destroying taxes will be avoided and other states enriched thanks to or governor’ tax foolishness lifted straight from the insanitea-party.

  • http://twitter.com/tscinti Joe Metz

    Luke, you make many good points and I completely agree this is a foolish and short-sighted proposal and it will have the very impact you suggest. But I will say that the act of filing the sales tax won’t be as difficult as is suggested, although, no question, it will be an added burden.

    Presently I do a sideline online sales business and I already collect sales tax on that and keep a simple spreadsheet. Twice a year, that money is paid electronically to the state and the filing is all done online. The state has set up a good easy system for doing this (something that predates the current administration).

    Today I wrote a letter to the governor and copied my own legislators, as well the leadership in both houses, as well as a few others who I know personally. The impact on my consulting and auditing business will be tremendous. And I suspect that, rather than just adding on the tax, my clients will require an adjustment in my fee structure to factor this in, especially with my audit business. My fee is on a contingency percentage and why would my client accept absorbing the tax leaving me with the larger share? They can just choose an auditor who is out of state and not worry about it. To maintain my business with fellow Ohio businesses, I’ll have to reduce my fee. As a small corporation, I pay $150 Commercial Activity Tax. Adjusting my fees downward, based on some rough numbers from last year, will cost me nearly $4K – an increase of over 2500%! (no, that’s not a math error).

    I’ll focus growing my business with clients who are outside the state of Ohio. Obviously, I won’t turn away an Ohio account, but my profit is going to be reduced, so why not find the work that will be more lucrative?

  • dmoore2222

    Great post! This is astonishing that a governor would have such a lack of understanding of the dynamics of the business environment. But it’s not surprising since there’s nothing in his work history that suggests he’s anything more than a political opportunist .

  • KDudley

    There’s another fallacy at play here: wages paid by the business owner are expenses that are deducted from the business owner’s tax liability. Income tax levels have no impact whatsoever on the money a business has available to hire; in fact, you could reason an income tax break would create the opposite incentive for a business owner. As income tax rates decrease, the opportunity cost of hiring someone increases. In other words, you are better and better off keeping the money to yourself than hiring someone as your rates reduce because the impact of the tax deduction for hiring decreases along with it. It’s very backwards thinking.

    And the increase to the costs of subject services is also dodgy here. Sales taxes aren’t levied at the state rate but rather the local rate. A new sales tax on a service will amount to a 7% increase in my area with local taxes coming along for the ride. The business owner is on the hook for this tax, not his/her customers or clients. The owner can choose to collect and pay or simply pay the tax based on business revenues. For an owner who is passing the tax on (as most business do), a 7% increase in prices overnight will definitely have a negative impact on demand. And you are right, bordering cities need to get ready for an influx of new customers.

    Whoever is behind this is lacking even a rudimentary understanding of economics. This modern obsession with meddling with tax codes with what appears to be drunk ideas collected on restaurant napkins is alarming.

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