The news from Ohio on the brokerage front is not good -- and more alarmingly, it may set a woeful example for other states.

Ohio, like many jurisdictions, is facing a budget shortfall, in its particular case perhaps as much as $4 billion during the next two fiscal years. And given the need to find new revenue, Governor Bob Taft has suggested that real estate commissions should be subject to a new tax.

"Currently, says the Governor, "services provided by real estate agents are not subject to the sales tax. This proposal would subject these services to the sales tax. These activities include buying, selling, and brokering in connection with the transfer of realty. The proposal specifically excludes service that constitutes the practice of law."

In addition to brokerage fees, the governor's plan would also impose a sales tax on title search and real estate management services.

The governor's plan would apply a sales tax to various services including "lobbying, cable TV, dry cleaning, admissions, and debt collection." Lawyers -- for reasons one cannot possibly imagine -- will not face a sales tax on legal fees despite Ohio's looming financial crisis.

If you're an Ohio licensee you should be inflamed about this. If passed, it means that a sales tax equal to 5 to 7 percent of the brokerage commission -- the amount will depend on the county where the sale takes place -- will be added to the transaction.

In a real estate transaction there is already a "sales tax" based on the value of the property, what are know as transfer fees or tax stamps. In effect, a sales tax by any other name is still a sales tax. What the governor really proposes is a tax on a tax, much to the harm of buyers, sellers and brokers.

With a sales tax on real estate commissions one of three parties will have to pay the state: the seller, the buyer, or the broker.

If it's the homeowner, then the sale price of the home has effectively been reduced. This means the seller has fewer dollars to pay off the mortgage and less money to purchase a replacement property. In the case of an owner forced to sell at a distressed price or by foreclosure -- say someone who lost their job, has had an illness or accident, or is selling in a down market -- the requirement to pay a sales tax may force them to borrow at a time when funds are not available or credit has been damaged.

If it's the buyer, the home now costs more which means either additional cash is needed at closing or a larger loan is required. For purchasers buying at the cusp of affordability -- and that defines a large percentage of all purchasers -- another big cost might make the transaction impossible. Fewer buyers means less demand, less demand will lead to reduced home prices and -- Gov. Taft might be interested in this -- lower home prices mean less revenue from property taxes, the key source of local funding.

Lastly, it might be the broker who is forced to pay the tab.

Imagine that a home sells for $250,000 with a 6 percent commission. That's $15,000 which is taxable under this proposal -- an amount suddenly devalued by $750 to $1,050 should the governor's plan succeed.

In this example it may seem that $15,000 is a lot of money -- but this sum is a gross amount, not profit or net income. Within this number are costs for advertising, listing, online services, MLS membership, transportation, licensure, and all the other expenses required to "be in business." Subtract an assortment of costs and the net result -- the so-called broker dollar -- is far less than $15,000. Trim the broker dollar enough and soon you won't have a lot of competitors vying for business -- not good news for brokers and not good news at all for consumers.

No less important, that $15,000 is likely to be divided between the listing broker and a salesperson and also between a buyer broker and the buyer broker's salesperson. If, for purposes of example, we divide $15,000 by four each licensee would receive $3,750 -- before expenses.

But can't brokers just raise their rates? In a word, no.

Real estate brokerage is a hugely competitive business -- just look at all the people who enter the industry and soon leave, or look at the 10 largest firms in the community today and compare them with the leaders a decade earlier. The result of competition is that brokers have rarely been able to raise typical commissions rates -- in my community they have remained stagnant for at least 30 years.

Gov. Taft is surely right to be concerned about the deficit which now threatens his state. But the best way to pay mounting bills is to contract government and enlarge the economy so that property values rise and residents have more income.

Alternatively, if Gov. Taft needs a few money-raising suggestions I have two to offer:

First, tax legal fees. If not, explain why. No doubt the good citizens of Ohio would like to hear why local dry cleaners should face higher taxes but not lawyers.

Second, tax campaign contributions. After all, it's only fair that politicians should be the first to underwrite the debt they have created.

For more articles by Peter G. Miller, please press here.

Published: February 4, 2003

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .