February 4, 2010

Ohio’s high tax burden, poor business tax climate is hurting economy

This op-ed appeared in the Chillicothe Gazette (Chillicothe, OH) on February 4, 2010.

In his recent State of the State address, Gov. Ted Strickland announced his plan to spur job growth through a $40 million Energy Gateway Fund focused on developing “green energy” jobs. What both the governor and the state legislature fail to recognize is that the state’s tax climate is driving businesses and individuals out of Ohio.

Ohio taxpayers have one of the highest state and local tax burdens in the nation and one of the worst tax climates for business. During the past 15 years, out-migration from the state has led to a shrinking economy and smaller tax base. At the same time, state government spending grew unchecked, resulting in a heavier tax burden on the state’s remaining citizens.

Between 1993 and 2008, the state lost 231,000 taxpayers and $19 billion in adjusted gross income to out-migration. In the same time period, state spending grew from $31.6 billion in 1993 to more than $67 billion in 2008 — a 47 percent increase even after adjusting for inflation and population growth.

State and local taxes consumed 10.4 percent of the state’s income in 2008 — seventh-highest in the nation. From a regional-competitiveness standpoint, Ohio is surrounded by states that have much lower tax burdens. Michigan, Indiana, Kentucky and West Virginia are all clustered in the middle of the national rankings (27th, 28th, 25th and 29th, respectively), while Pennsylvania’s tax burden is 11th highest in the nation but still lower than Ohio’s.

Ohio’s top income tax rate of 5.925 percent is about average regionally and nationally. However, this does not include the income tax rates imposed by most Ohio cities and school districts, which can boost the overall rate to more than 7 percent. In addition, Ohio’s income tax system has nine separate tax brackets before the top rate kicks in at $200,000, and these brackets are not indexed to inflation.

All of Ohio’s neighbors except Indiana have lower combined state and local sales tax rates than Ohio’s 6.83 percent average rate. In addition, Ohio’s sales tax applies to many business-to-business activities, which increases the cost of doing business in the state.

Ohio’s commercial activity tax is a particularly harmful type of gross receipts tax that results in what economists call “tax pyramiding” because it applies to all transactions, including business-to-business purchases of supplies and other materials.

While Ohio’s property taxes are a relatively modest $1,165 per capita, the state undermines its growth potential by being one of 22 states with a capital stock tax (levied on the wealth of a corporation) and one of only 10 states with an intangible property tax (imposed on things such as stocks, bonds and even trademarks). Ohio also imposes its own estate tax, with a much lower taxing threshold ($338,000) than what exists at the federal level.

The first step to reforming Ohio’s tax structure should be to reduce the state’s reliance on business taxes by eliminating the CAT tax, the capital stock tax and the intangibles tax. These are the most anti-growth taxes within the Ohio tax system and reducing their punitive effects on business should be job one for Ohio lawmakers.

Next, lawmakers should simplify the individual income tax system by eliminating those multiple brackets and moving toward a flatter system similar to those in Indiana, Michigan and Pennsylvania.

Finally, Ohio should get out of the business of doling out incentives to lure business into the state. Fairness and experience tell us that lower tax rates for all are better than incentives for some.

Without sensible reforms soon, economic growth opportunities will pass Ohio by and the state’s finances will continue to worsen. Cutting the state’s tax burden and implementing pro-growth tax reforms can go a long way toward reversing these dismal trends.