In February, we gave a lukewarm appraisal of a lukewarm tax plan that Governor Kasich was pushing in his budget for Ohio. Some elements of the plan were good. The plan would broaden the sales 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. to include services, and cut the rate from 5.5 percent to 5 percent. This move would leave a lot of revenue though, and the plan would apply that revenue to cutting income tax rates across the entire nine bracket structure by 20 percent. While those are good reforms, we were critical of the generous exclusion for passthrough entities that would allow them to deduct half their income below a $750,000 threshold. This gimmick was mainly a political ploy that claims to help a sympathetic constituency (small business), but in reality just creates an incentive to organize your personal income as small business income to get a large tax cut.
After the Ohio House got hold of the plan in April, the 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. base expansion and the small business carve out were removed and the income tax cut was reduced to just 7 percent across-the-board. Now that the Senate has hold of budget, the House’s 7 percent income tax reduction is gone and the small business carve out is back in.
This is bad policy, and many supporters are errantly pushing it under the guise of putting more money in the hands of “job-creators.” But this is based on a flawed understanding of what creates jobs. The businesses that actually create jobs are not small businesses or big businesses; they are businesses that are growing. And that type of business is virtually impossible to target with a tax incentive.
So while I’m the first to recognize that politicians would probably rather say “I cut taxes on businesses in half!” than “I cut taxes for everyone by 7 percent,” the latter claim is a far less distortive approach; one that doesn’t pick winners and losers in the economy. Ohio deserves real reform, not gimmicks.
PS-The best plan in Ohio right now is not this one snapping up AP headlines, it’s the administrative reform that would start to fix Ohio’s highly unusual municipal income tax system.
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