Some high-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. states take pride that they are high-tax, trumpeting the services they provide with the revenue. Others work to reduce tax burdens. But there are some others that sit in denial.
An editorial in the Dayton Daily News is an example of this denialism. Ohio, according to our State-Local Tax Burdens report, has steadily become a high-tax state, rising from 45th highest tax burden in 1977 to 7th highest today. 10.4% of Ohioans’ income goes to state-local taxes, up from 8.2% in 1980. Ohio also scores near the bottom of our State Business Tax Climate Index, particularly due to how it structures its individual income and property taxes.
But, claims the Daily News and others, things aren’t so bad, right? After all Ohio has no corporate income tax (or won’t as of 2010, when it phases out fully), its tax rates aren’t too high, and tax collections are only 38th highest according to Census.
Wrong, and here’s why:
- First, don’t believe anyone who says that Ohio is a “low-tax” state for business. True, Ohio will soon have no 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. . But it has something even worse: a gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. , called the Commercial Activities Tax (CAT). This pernicious tax hits the receipts of profitable and unprofitable companies alike, and pyramids through the chain of production, distorting price signals. Essentially all public finance experts revile such taxes, and they hit business activity hard. The CAT is probably worse than the tax it replaces, and for the moment, Ohio businesses have to pay part of both of them.
- Second, while the state has been reducing its high income tax rates to a medium top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate, Ohio also has a lot of local income taxes. The rates and brackets are numerous and complex (the state rates go to the thousandth of a decimal point, and there are 5 brackets below $40,000, for instance).
- The studies the Daily News and other denialists cite ignore economic incidence and tax structures in favor of formalistic legal incidence. Yes, Ohio ranks in tax collections lower-than-average but not at the bottom. But what matters is the taxpayers, not the tax collections. Policymakers and stakeholders should ask: what percentage of residents’ income are they paying in state and local taxes? Ohio is in the highest ten states under this framework.
- Tax structures also matter, because even a small amount of money can be problematic if it is collecting in a distortive or damaging way. Ohio ranks fourth worst in the country for business-friendly tax structure.
Ohio’s tax struggles are well known, even putting our studies aside. The Daily News editorial argues that Ohio’s real problem is that it is “inept” at telling the real story: some bright engineers (but scoring poorly at college graduation rates), good precision manufacturing (but not enough jobs to prevent young people from leaving for other states), and a low cost of living (signalling low demand). They moan that the only thing standing in the way of this hidden paradise from being common knowledge is the Tax Foundation’s studies.
We have no reason to boost one state over another; it just goes to show that it’s easier to shoot the messenger than to fix real problems. Who knows – if they just repeat “Ohio is a low-tax paradise” enough times, maybe people will come to believe it. But it’s still not true.
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