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Ohio’s Recent Graduate Problem

3 min readBy: Aditya Yellajosyula, Scott Drenkard

Of the many problems that the Great RecessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. created, one of the most significant was unemployment for new college graduates. While this issue has not been at the forefront of the economic recovery, its negative implications on high student debt in addition to long-term unemployment will prove to be a serious problem if not given attention. On August 15, Representatives John Rogers (D-OH) and Terry Blair (R-OH) of the Ohio state legislature introduced HB 246, which aims to give college graduates 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. relief through credits for school-related expenses, while alleviating recent graduate unemployment through business tax incentives.

The first component of the proposal is to reduce burdens on college graduates by giving them income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s applicable to tuition, books, and equipment. Room and board expenses can be claimed as part of the credit if the tax filer is at least a part-time student.

The first portion of the incentive is only available to employed graduates, so there is an initial concern about how much good this will do for reducing unemployment. But perhaps more problematically, tax credits for tuition may be–and likely have been in the past–countered by institutions simply raising tuition prices. While current graduates would not be affected by this change (they’ve already paid the tuition and now get a tax break), future college students may be met with higher tuitions as the credit is capitalized into the price of their schooling. In that regard, income taxes would become non-neutral as soon as the policy was passed by favoring the latest class of recent graduates over future cohorts.

The second section of the bill allows Ohio businesses to deduct recent graduate hiring expenses from the Commercial Activities Tax (CAT), the state’s problematic 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. . A percentage of hiring costs involving any combination of wages, health insurance, and worker’s compensation premiums can be deduced from taxable gross receipts. The deduction is halved each year, starting at a 100 percent rate, for five years of the employee’s tenure. While this approach may be politically expedient and it would marginally reduce the amount of revenue raised from the CAT, it does not address the real issue–the CAT in its entirety is a poor revenue source. This tax needlessly creates tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. , which creates economic distortions and burdens producers and sellers, who later pass these burdens on to consumers in the form of higher prices on goods.

Even if firms did hire recent graduates at a greater rate as a result of the policy, it is still unadvisable given the impact on tax neutrality. Instead of considering a diverse pool of applicants for positions, companies would zero in on those coming right out of college disproportionately to reap the benefits of the deductions. Hiring new college graduates is great, but only if it makes business sense; there’s no real economic reason why recent graduates deserve special treatment over other unemployed Ohioans.

The bottom line is that while Ohio’s intentions for its recent graduates may be good, the methods Representatives Rogers and Blair recommend complicate tax structure, narrow tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s, and result in non-neutrality. Instead of adding additional sections to the tax code to solve recent graduate unemployment, Ohio may want to do away with the gross receipts tax in favor of a conventional and low 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. rate to give businesses the means to hire more employees of all ages.

To read HB 246, click here.
For more on Ohio, click here.

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