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In “Battleground” Ohio, Tax Politics Are Local

4 min readBy: Scott Hodge

Among President Bush’s domestic policies, none are more controversial than his taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts. Senator Kerry assails them in every speech, claiming that they have hurt the country, promising to repeal any that benefit taxpayers with high incomes.

As the economy has grown throughout the spring, adding about a million jobs nationally in February, March and April, the tax argument is becoming easier and easier for President Bush to win. In some states, though, the local debate over tax policy overwhelms the debate over national tax policy, and Ohio might be one of those states.

A fiscal mess caused by years of overspending has trapped Ohio in a vicious cycle of tax hikes and deficits. A recent poll conducted for the Buckeye Institute found that 78 percent of Ohioans would favor a proposal to limit state spending to no more than the rate of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . An even more overwhelming majority (86% to 9%) favored spending cuts over tax increases if the state confronts another budget deficit, as it is now predicted to do.

If not for the recent federal tax cuts, Ohio taxpayers would be even more hard-pressed to finance their burgeoning state and local governments. In 2004, Ohio ’s federal tax burden of 16.2 percent of income is 37th highest in the nation. As recently as 2000, Uncle Sam was taking 21.1 percent of Ohioans’ income. That’s approximately $12.3 billion that the Bush tax cuts have spared Ohioans in federal tax payments over the last four years.

But the story at the state-local level is quite different. In the Tax Foundation’s recently released ranking of combined state-local tax burdens in the 50 states, Ohio ranked third highest, taking 11.3 percent of its citizens’ income compared to a national average of 10.0 percent (see here for more on Ohio’s tax burden). Only the state and local governments of New York and Maine will be taking a larger fraction this year.

Ohio’s neighboring states’ tax burdens in 2004 were all lower: Indiana – 10.1% (16th highest), Pennsylvania – 9.4% (35th highest), West Virginia – 10.6% (8th highest), Kentucky – 10.0% (17th highest) and Michigan – 10.2% (13th highest).

This high-tax environment in Ohio is fairly new. In 1990 Ohio’s state-local tax burden ranked not 3rd but 30th, well below average (9.8% of income compared to a national average of 10.3%). By 1997 Ohio ranked 20th, and in 2000, 13th. State rankings rarely change this rapidly, but over the course of the last 14 years, Ohio’s state-local tax burden has risen significantly faster than individual income.

Sometimes a state can prosper with a heavy tax burden if its tax system is arranged in a way that’s unusually favorable for business. That’s certainly not the case in Ohio. On the Tax Foundation’s State Business Tax Climate Index, Ohio ranked 4th worst. Only Mississippi , California and Arkansas had tax systems more inimical to economic development.

The State Business Tax Climate Index measures the impact of each state’s tax system by comparing it to the other states on five issues: sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rates, personal income tax rates, corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rates, the balance over time between tax growth and spending growth, and the complexity of the state tax system.

Ohio scores poorly on every component of the index, but it was the state’s corporate income tax that really stood out, with only 4 states tally a lower score. Ohio’s corporate income tax rate is 8.5 percent on all income above $50,000.

The personal income tax system isn’t much better. It affects many small businesses as well as all individuals and is one of the nation’s most complex, composed of nine separate tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s (only Missouri and Montana have more). Along with this complexity comes a fairly high top rate of 7.5 percent — only 9 states have a higher rate.

However, Ohio’s sales tax rate has gotten most of the attention lately. It stands at 6 percent, compared to national median of 5 percent. Ohio was at the median until the summer of 2003, when a tax hike passed, raising it from 5 percent to 6 percent. (Local sales taxes are additional, with 77 of Ohio ’s 88 counties adding on between 1 and 2 cents.)

The state-level increase is currently scheduled to expire after two years, with the rate reverting to 5 percent. Secretary of State Ken Blackwell is campaigning to repeal it earlier by referendum, but forces in favor of making the tax permanent have created legal obstacles that may derail the referendum. This referendum issue is keeping the tax issue before the public’s attention, which is exactly where it should be. No state is more clearly in need of tax reform than Ohio.