Ohio Gov. John Kasich recently unveiled a plan to dramatically shift the state’s tax base away from income and toward consumption. It would significantly reduce the amount of state income tax Ohioans pay – up to 50 percent on some small-business income – but it also ads sales tax to numerous economic activities that are not currently taxed, including accounting and legal fees.

Ohio State Tax Base - Ohio Tax Planning Some consumers and business owners have expressed concern that Kasich’s proposal would increase their taxes, while other business groups – such as the Ohio Manufacturers Association – support the proposal and are encouraging their members to support it.“The effect of this specific proposal would be to free up much-needed working capital for small businesses across Ohio, increasing job-creating investment in those companies,” OMA President Eric Burkland wrote in a press release. “The proposed personal income tax reduction also would help entrepreneurs in early-stage businesses where the risks are high and working capital often is in short supply.”

Kasich’s plan would reduce the tax on pass-through entity income by 50 percent, on income up to $750,000. The administration estimates it will save small businesses more than $600 million per year.

The plan also would reduce personal state income tax rates by 20 percent over the next three years, dropping the top marginal tax rate from 5.925 percent to 4.740 percent. The administration estimates that it would save taxpayers $7 billion over those three years.

Meanwhile, the sales tax rate will be cut from 5.5 percent to 5.0 percent, but it will be applied to a much wider base of activities – essentially, all goods and services except those related to health care, education and housing. Among the transactions that will now be taxed are bank service charges, admission to sporting events and amusement parks, and accounting and bookkeeping services.

In announcing the proposed changes to the tax base, Ohio Tax Commissioner Joe Testa said, “We have been shifting from a goods-based economy to a service-based economy for many years.”

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