Ohio’s Changing Fortunes: Can the State’s Economy Overcome the Tax Burden?

June 19, 2006

Download Special Report No. 143

Special Report No. 143

Introduction
In 1971, Ohio lawmakers voted to impose a tax on the income of all individuals and corporations in Ohio. When the votes were cast, Ohio was a low-tax state. But the course set by lawmakers in 1971 would radically transform Ohio into a high-tax state over the next 35 years.

In 1970, Ohio had the 4th lowest state and local tax burden in the country, according to data on income and taxes from the Department of Commerce. As recently as 1980, Ohio had the nation’s 7th lowest tax burden. In the early 80s, however, Ohio lawmakers began a series of tax increases that would trigger a precipitous climb to almost the top of the state and local tax burden rankings. In 2006, Ohio ranked third, with only Maine and New York’s residents paying heavier state-local tax burdens.

Ohio lawmakers have raised taxes recently as well. Indeed, they have done so no less than four times in the past five years. Even when lawmakers tried to reform Ohio’s tax system in 2005 — perhaps a tacit admission that taxes were too high — they still ended up raising taxes overall and imposing a new business tax that could seriously harm the competitiveness of Ohio’s tax system.

Ohio lawmakers still have much work to do to reverse these historical trends. Entrepreneurial lawmakers would be wise to look to the state’s taxation of general sales as well as its taxation of property and other assets. Both of these systems are ripe for reform. The data from 1970 to 2006 are clear: Ohio — which once could boast of a low tax burden — now has one of the highest.

We use three metrics to assess Ohio’s tax system. First are our own estimates of each state’s combined state-local “tax burden” (taxes paid as a percentage of income) which are based on income and tax data from the Department of Commerce’s Bureau of Economic Analysis. Secondly, we cite the final tallies of tax collections in each state as reported by the Census Bureau; and finally, we cite our own State Business Tax Climate Index which brings a more qualitative approach to measuring the tax competition among the states. By any measure, Ohio has become a high-tax state where, all else being equal, economic activity is likely to lag.


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