October 9, 2006

Taxing Times in the Buckeye State

(The following article originally appeared in the October 9, 2006 edition of the Lima News.)

All politics are local, and taxes are certainly no exception. With Ohio’s hotly contested gubernatorial race heating up between Congressman Ted Strickland and Secretary of State Ken Blackwell, taxes are unquestionably on the minds of voters as they prepare to cast their ballots in November.

A fiscal mess caused by years of overspending has trapped Ohio in a vicious cycle of tax hikes and deficits and it is clear the next governor will have to address this issue. In the Tax Foundation’s recently released ranking of combined state-local tax burdens in the 50 states, Ohio ranked third highest, taking 12.0 percent of its citizens’ income compared to a national average of 10.6 percent. Only New York and Maine will be extracting a higher tax burden than Ohio this year.

Ohio’s neighboring states’ tax burdens in 2006 are all lower: Indiana — 11 percent (12th highest), Pennsylvania — 10.4 percent (24th highest), West Virginia — 10.6 percent (21st highest), Kentucky — 10.7 percent (20th highest) and Michigan — 10.8 percent (16th highest).

This high-tax environment in Ohio is a recent occurrence. In 1990, Ohio’s state-local tax burden ranked 30th, well below average. By 1997, Ohio was up to 19th, and in 2000, 14th. State rankings rarely change this rapidly, but over the course of the last 16 years, Ohio taxpayers have seen their state-local tax burden rise significantly faster than their income.

The tax burden is not the only important measure of tax policy. Tax structure — the manner in which the tax is extracted — is also significant. The Tax Foundation’s 2006 State Business Tax Climate Index compares the states in five objective areas that impact business: taxes on corporations, individual income taxes, sales taxes, unemployment insurance taxes, and taxes on wealth.

Sometimes a state can prosper with a heavy tax burden if its tax system is structured in a way that’s favorable for business. However, that’s certainly not the case in Ohio: the State Business Tax Climate Index ranks Ohio 4th worst. Only Rhode Island, New York and New Jersey had business tax climates that were worse than Ohio’s. Ohio’s low ranking is due, chiefly, to high sales tax rates, high individual income tax rates, and a poor wealth tax system that includes a separate estate tax levy (most states copy the federal system).

Of course, many Ohio lawmakers think they’ve solved Ohio’s tax problems. House Bill 66 — the 2005 budget bill — contained sweeping changes to Ohio’s tax code, including reductions in individual income tax rates, elimination of some business property taxes, higher sales tax rates, higher cigarette taxes, and the imposition of a new gross receipts tax (the commercial activities tax, or “CAT”).

While only time will tell whether House Bill 66 will reduce the overall tax burden, from a structural perspective, it’s probably a wash, since the tax rate reductions are largely offset by increases in other taxes. The imposition of the CAT could lead to a structural disaster, as gross receipts taxes are highly distortionary between firms and can also extract higher burdens than income taxes during times of recession.

As voters in Ohio prepare to cast their ballots this fall to elect a new governor, it is evident that Ohio is in dire need of tax reform. Hopefully the newly elected leader will be up to the task.

Jonathan Williams is a staff economist at the Tax Foundation in Washington, D.C.