Beginning today, Ohio shoppers will pay a bit more, but Ohio workers will pay a bit less, as the state sales tax goes up and income tax comes down.
The changes are part of the state’s tax reform package passed in June but taking effect today.
Sales tax will rise from 5.5 percent to 5.75 percent, or 25 cents for every $100 spent, on vehicles, electronics, clothing and other retail goods. Groceries, housing, medicines and education are exempt from sales taxes.
State income tax will drop 10 percent over the next two years, including 9 percent beginning today.
Ohio lawmakers in June approved the changes as part of the state’s $62 billion, two-year state operating budget. The increase is part of a larger package of tax adjustments that will reduce overall business and individual taxes by an estimated $2.7 billion over the next three years. That includes a 50 percent cut to small business taxes.
Area retailers and car dealers, last week were expressing little concern with potential effects of the quarter-percent sales tax increase.
“Honestly I don’t think it’s going to have an effect, it’s just such a small increase,” said Chuck Paden, General Manager of Cole Valley Chevrolet in Newton Falls.
“We just do so much leasing these days. To give you an example on a $200 car payment it would just be 4 or 5 dollars,” he said.
On a larger vehicle purchase he said the cost difference may be more substantial.
Gary Gudmondson, communications director for the Ohio Department of Taxation, pointed out that when a new car buyer uses a trade-in model, Ohio sales tax is assessed only on the difference between the two, not the entire new car price.
Policy Matters Ohio, a liberal think tank in Cleveland, has estimated that the income-tax cuts would result in the top 1 percent of Ohio wage earners on average receiving $6,000 a year while the bottom fifth of wage earners would have to pay $12 a year.
During budget debate this year, the group proposed that Ohio offer a sales-tax credit for lower income families as a targeted way to help offset some of the impact of tax changes on poorer Ohioans. Five states offer such credits.
Dr. Jolien Helsel, professor of regional economics at Youngstown State University, said she doesn’t believe that the changes will cause a huge difference.
“They are switching the source from income tax to sales tax,” she said. “It’s very preliminary. The impact is not going to be very large for individuals in the lower and middle income brackets. … It’s not going to have a significant change on their life style.”
Helsel said taxes are either progressive, like income taxes, meaning they impact the wealthy, or regressive, like sales taxes, which tend to affect lower income classes. Sales taxes are imposed on everyone whether they are working or not and those with lower incomes tend to spend a larger percent of their paycheck.
Although income tax withholding drops by 9 percent beginning today, the reduction in the income tax rate is retroactive to Jan. 1. That means Ohio workers will see a larger tax refund when they file their state taxes in the spring, Gudmondson noted.
The Ohio Department of Taxation estimates that only 35 percent of an average Ohio family’s spending is subject to the sales tax. Even with the latest change – Ohio’s first increase since 2003 – the state’s rate is still lower than about half the U.S. states.
Helsel said, putting political ideals aside, lower income taxes are more appealing to businesses.
“Any decrease in income tax is good for the economy in general. We need businesses to drive the economy,” she said.
Trumbull County sales tax will rise to 6.75 percent Mahoning County’s sales tax will increase to 7 percent and Columbiana’s to 7.25 percent.
“I think you could ask most people what the sales tax is and they wouldn’t know,” Cohen said.
Ohio first enacted a sales tax in 1935. The rate then was 3 percent. The rate rose to 4 percent in 1967 and to 5 percent in 1981, according to information from the state Tax Department.
In 2003, state lawmakers temporarily tacked a penny onto the tax – raising the rate to 6 percent for the next two years. In 2005, it was dropped to 5.5 percent.
Marty Cohen, owner of Micky’s Army Navy in Warren, said the small, incremental increases have not affected his business in the past.
“I think it will only have a minimal effect on sales,” he said. “An increase is never good for the consumer, but it’s important to keep things the way they are.”
Tribune Chronicle Business Editor Brenda J. Linert and the Associated Press contributed to this report.