Ohio Spending Growth and Income Tax Options

January 12, 2010

Our recent report on Ohio’s poor tax climate has garnered lots of attention, here, here, here, here, and here. The word is getting out that Ohio has structural issues with its tax system that require cutting the state’s tax burden and implementing pro-growth tax reforms.

The “Plunderbund” blog, however, claims that our report shows that cutting tax burdens and the income tax would not be effective. This is not the case. I address each of the blog’s claims, one by one:

CLAIM: Ohio‘s net outward migration accelerated after 2005, when it cut its income tax.

FACT: Just because two things happened in 2005 doesn’t mean one caused the other. The 2005 tax changes went beyond just the income tax cuts, and included the implementation of a destructive gross receipts tax, and a slow phase out of the state’s antiquated franchise and inventory taxes. Further, many other factors could be contributing to Ohio’s acceleration in net outward migration. There is no evidence to suggest that Ohio’s modest and phased in income tax cut directly caused Ohioans to flee the state.

CLAIM: The report’s suggestion that Ohio should consolidate its income tax brackets and reduce business tax burdens is evidence that more ambitious tax reforms will not be effective.

FACT: The study did not evaluate more ambitious tax reforms and therefore should not be used as conclusions about their effectiveness. The blog specifically claims Republican gubernatorial candidate John Kasich is pushing for repeal of the individual income tax. On Kasich’s campaign website, however, his tax plank is: “Lower Taxes — Create a tax climate that allows Ohio to compete with other states to attract new businesses, foster job creation, and keep our precious, existing jobs here.” Our report makes suggestions about some incremental improvements that could improve Ohio’s tax climate.

Kasich has mentioned in the past that he “would like” to repeal the state’s income tax, apparently part of a phased-in package. That’s not out of the realm of possibility, considering that nine states levy no tax on wages. For the sake of argument, we ran a repeal of Ohio’s income tax through our State Business Tax Climate Index, which evaluates state tax systems for how they raise revenue. Just from that one change, Ohio would rise from 47th best tax climate to 8th best, leaping 39 places into the top ten. The income tax system would go from the 46th best to tied for first. That would certainly catch the attention of entrepreneurs.

CLAIM: The report shows that Ohio’s spending is relatively flat from 1993 to 2008.

FACT: Even after adjusting for population and inflation, spending has grown 47% between 1993 and 2008. The numbers we used in our original report were wrong and we have now corrected them. Here is a table with revenue and spending numbers from various categories for the two years in that year’s dollars, with the final column adjusting for inflation growth of 39 percent and Ohio’s meager 4 percent population growth:

Growth of State Government in Ohio, 1993-2008

Year

1993

2008

Growth Rate

Total Revenue (including revenue from liquor stores and special funds)

$38.341 billion

$65.860 billion

18.4%

General Revenue (taxes, federal aid, and user fees)

$24.483 billion

$54.681 billion

54.0%

Tax Revenue

$12.788 billion

$24.948 billion

42.2%

Total Expenditure (including expenses for liquor stores and special funds)

$31.664 billion

$67.788 billion

47.6%

General Expenditure (including transfers to local governments)

$25.037 billion

$54.580 billion

50.3%

Direct Expenditure

$16.723 billion

$36.475 billion

50.4%

Budget numbers are in nominal dollars. Source: U.S. Census Bureau State Government Finances data page. Growth percentages are Tax Foundation calculations derived from GDP deflator data from the St. Louis Federal Reserve and U.S. Census Bureau annual population estimates.

It should be noted that total revenue in 2007 was $87.5 billion, so 2008 was a significant drop. Even after the budget cuts of recent years, expenditures haven’t shrunk much to match that revenue drop. Governor Strickland has proposed a 2010 total expenditure level of $63.9 billion and a 2011 level of $65.3 billion. (Executive Budget, page C-5.)

Claims that Ohio’s tax system is just fine the way it is don’t bear out in reality. With the seventh highest state-local tax burden in the country, the fourth worst business tax climate, a destructive gross receipts tax, and average tax rates, Ohio is not well positioned for economic growth once recovery occurs. As our migration data shows, people are voting with their feet. Ohio has tried high burdensome taxes and should now try something different.


Topics


Tags


Related Articles