Policy Matters Ohio and Tax Foundation Agree: Tobacco Taxes and Taxes on Business Not Stable Revenue Sources

March 27, 2014

Today, we released a report with a list of recommendations for how Ohio Governor John Kasich (R) can improve his 2014 suggestions for tax reform. But there is another report released this week by Policy Matters Ohio that is worth reading as well, and we were surprised to find it comes to some similar conclusions. They find that the offsetting tax hikes that Kasich uses as the pay-for of his income tax cuts are not sustainable revenue sources. Particularly, they find that increasing the cigarette tax results in declining revenue streams, and increasing the Commercial Activities Tax (CAT) results in more volatile revenue streams.

In their words:

“Tobacco taxes have been declining for years, apart from when tax increases have led to revenue spikes. And the CAT, the state’s major business tax, has been “strongly cyclical,” as a top official at the Ohio Department of Taxation (ODT) testified in 2011. […] It would not be financially responsible for the General Assembly to approve the income-tax cuts when the revenues used to support them are so uncertain.”

Regular readers will recall that we don’t always agree with Policy Matters Ohio, but in this case, their appraisal is in line with our findings. We similarly criticized President Obama’s plan to increase cigarette taxes to pay for pre-kindergarten education, noting that depending on tobacco taxes as a long term funding mechanism for government services is problematic because cigarette taxes have the irreconcilable goals of raising revenue while decreasing consumption. We’ve made a concerted effort to draw attention to the deficiencies of gross receipts taxes like the CAT in the few states that still have them. Texas notably saw revenue shortfalls when it instituted its Margin Tax in 2008.

Policy Matters Ohio ultimately backpedals a bit to argue that tobacco taxes and business taxes should be hiked independently because the revenue could be used for more government spending, but in the effort to discredit the Kasich proposal, they’ve hit on a key truth: the best taxes for stable budget planning are broad-based, non-distortionary taxes. We agree.

See our suggestions for moving Ohio to a more stable, simple system here.

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