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Robert Higgs
By Robert Higgs February 27, 2013

Ohio Tax Commissioner Joseph Testa says consumption has shifted over the years from goods to services

Ohio Gov. John Kasich has proposed a broad overhaul of the state’s tax system as part of his biennial budget proposal.

At a news conference to unveil his plans, he called on Ohio Tax Commissioner Joseph Testa to help explain proposed changes in the tax code.

The governor’s proposal includes cuts to the state’s personal income tax and a 50 percent income deduction for small businesses. One way some of that revenue loss would be offset is through changes to the state’s sales tax.

While the 5.5 percent rate would be cut to 5 percent, the tax base would be broadened by applying it to most services. It now principally applies just to sales of goods.

Testa, while explaining the plan, said the changes were long overdue and needed to address the evolution of the state’s economy over nearly eight decades.

"About two-thirds of all consumption is services. The tax code has never been updated to address that. It was just the opposite (when the tax was enacted) in the '30s."

PolitiFact Ohio decided to assess the tax commissioner’s claim.

Ohio enacted its sales tax in 1935 as a way to raise revenue to help public schools that were struggling to pay their bills during the Great Depression. At the time, most schools received their funding through property taxes.

Many Ohioans failed to pay their taxes because of the difficult economic times, according to Ohio History Central, an online product of the Ohio Historical Society. As a result, schools had less money to pay educational expenses.

Prior to enactment of the Ohio Retail Sales Tax Law there were taxes on sales of cigarettes and gasoline, but on few other products. The new tax extended to nearly all goods, and dramatically increased tax receipts. It raised nearly $17 million for public schools in 1935. Some revenue also went to help local governments.

Since then, the tax has remained focused on the sale of goods. The governor’s budget proposal, though, would add the tax to sales associated with nearly all services. Everything from haircuts and movie tickets to lawyer bills and real estate services would be subject to a 5-cent tax on every dollar.

But what about Testa’s contention that Ohio’s economy has evolved and that transactions involving services now account for two-thirds of all personal consumption expenditures?

We contacted Testa’s office to ask on what he based his statement. Were there numbers to support the reversal in spending habits?

Gary Gudmundson, a spokesman for Testa, provided a chart that the Department of Taxation had prepared for the budget rollout. It attributed its figures to the Bureau of Economic Analysis, which is part of the U.S. Department of Commerce.

For 1935, the year Ohio enacted the sales tax, it showed total personal consumption of $55.9 billion, with $31.6 billion (56.5 percent) going toward goods and $24.3 billion (43.5 percent) going to services. Not quite 2-to-1 in favor of goods, but goods sales accounted for a solid majority of purchases.

Money spent on personal consumption climbed steadily over the years. By 2012 the total consumption figure was about $11.12 trillion. About $3.78 trillion (34 percent) was for goods purchases. About $7.34 trillion (66 percent) was for services.

We checked and the numbers provided in the state’s chart match the Bureau of Economic Analysis data.

It should be noted, though, that the data reflects money spent on goods and services on a national basis. The Bureau of Economic Analysis told us that it didn’t have state-by-state data. Gudmundson said the state had rough figures that only went back to the ‘80s, but that the expectation was that Ohio, as one of the larger states in the nation, would have economic experience similar to the national figures.

State-specific numbers on production help bolster Testa’s contention, although production is not the same as consumption. In 2011, the state saw $326 billion in privately produced services and $102 billion in privately produced goods. The figures illustrate "the continuing shift in Ohio’s economy away from goods production and towards services," according to a report last year from Ohio’s Policy Research and Strategic Planning Office.

So where does that leave Testa’s claim?

He said that about two-thirds of consumption is for services, and on a national basis, data shows he is correct. One could reasonably conclude that the same trend holds true in Ohio. Testa also said it was just the opposite when the state enacted its sales tax.

On a national basis, the goods purchases didn’t account for two-thirds of total consumption in 1935, but it was a significant majority. And the numbers support Testa’s overarching point that the economy has changed significantly since then to be a service dominated market.

With those points of clarification, the tax commissioner’s claim rates Mostly True.

Our Sources

Joseph Testa, news conference to unveil Gov. John Kasich’s budget proposal, Feb. 4, 2013

Ohio History Central, Ohio Retail Sales Tax Law of 1935, accessed online Feb. 21, 2013

Bureau of  Economic Analysis, Personal Consumption Expenditures by Type of Product, accessed online Feb. 21, 2013

Email exchange with Gary Gudmundson, Ohio Department of Taxation spokesman

The Plain Dealer via, "Ohio Gov. John Kasich's budget would slash income taxes, lower and broaden the sales tax and revamp oil and gas tax," Feb. 4, 2013

State of Ohio, Ohio’s Jobs Budget 2.0

Ohio Policy Research and Strategic Planning Office, "Gross Domestic Product from Ohio," August 2012

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Ohio Tax Commissioner Joseph Testa says consumption has shifted over the years from goods to services

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