Sales tax on Ohio lawyers, CPAs won't be easy sell

JULIE CARR SMYTH AP Statehouse Correspondent Published:

COLUMBUS, Ohio (AP) -- Gov. John Kasich's plan to tax the professional services of lawyers, accountants and others faces a host of hurdles.

The $63.3 billion, two-year state budget Kasich introduced this week calls for lowering the sales-tax rate from 5.5 percent to 5 percent, while applying the tax to additional areas -- including entertainment, cable TV, and certain services. The plan would exempt child care, rent, medical and other basic services.

If other states can be considered a measure of how "service" taxes fare, Kasich has a political fight on his hands.

Outside Ohio, the tax has spurred debate over how to levy the tax on big legal or accounting firms that work across state and international borders, on the impact on customer costs, and on competitive disadvantages that those who are taxed might suffer.

The Republican governor says his plan is different, noting that it lowers the overall rate to reduce the hit on all businesses, cuts income and small-business taxes along the way, and comes as part of a major overhaul he sees as bringing fairness to Ohio's patchwork tax code. Other states that have tried to pass a service tax were trying to fill budget holes, he said.

"Certainly, what the governor is proposing in terms of the breadth of the expansion is something that has not been done in a very long time," said Michael Mazarov, a senior fellow at the nonpartisan Center on Budget and Policy Priorities. "This is pretty far-reaching in terms of what states have done in recent years."

Some states where it's worked are Hawaii and South Dakota, which are more geographically isolated and perhaps less subject to the competitive side effects of the tax.

Professional organizations for Ohio lawyers and accountants have so far held off judgment, saying they are hearing concerns but still evaluating the governor's plan.

Barbara Benton, a lobbyist with The Ohio Society of CPAs, said she's heard from many accountants who are concerned about the tax but the organization hasn't taken a position on the proposal yet.

"It's a comprehensive tax package, and we want to look at all the components," Benton said.

Ohio State Bar Association spokesman Kenneth Brown said his organization has traditionally been opposed to service taxes, but he said the group was taking a closer look at the proposal before offering an opinion.

"Times are different now," he said.

Jennifer Green, a former lobbyist for the Florida Institute of CPAs, said similar proposals have surfaced repeatedly for decades in Florida. All but one failed to gain traction. And the one that won legislative approval, in the late 1980s, was revoked within six months.

"What you hear a lot is these businesses aren't going to absorb another 6 percent," she said. "They're going to increase their fees and pass that on to consumers. And is that really going to stabilize Florida's economy?"

On the day of his budget unveiling, Kasich predicted that lobbyists -- experts on legislative negotiating -- would try to get the tax on their own industry removed from Ohio's budget bill.

Green said more than self-interest has driven opposition to the plan. She said determining who is the end user of the service is difficult. If a lobbying firm hires both an accountant and a lawyer to help on a project, which one is taxed and who pays, she said.

Taxing legal services also would hit middle-income families on transactions such as estate planning, divorces and adoptions, Mazarov said.

Michigan businesses hated the tax on services that then-Gov. Jennifer Granholm tried to impose in 2007. The plan aimed to raise $1.5 billion a year by increasing the sales tax on services by 2 percent.

The final state budget passed by the state's Republican-controlled Senate and Democrat-controlled House included a tax on some services of 6 percent. It was greeted with such fierce opposition that lawmakers repealed the tax just as the state was preparing to put it in place.

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Associated Press writers John Seewer in Toledo and David Eggert in Lansing, Mich., contributed to this report.