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.
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.