An expanding industry merits expanded state attention

The Akron Beacon Journal

The payday lending industry has expanded rapidly the past decade, doubling in size since 2000. Ohio mirrors the story. In 1996, there were 107 payday businesses in the state. Today, the number exceeds 1,500. In Summit County, the number went from three in ’96 to 65 last year. Stark County went from two to 65, Wayne from zero to nine, Portage from zero to nine, Medina from zero to 15.

Payday lending involves short-term, high-interest loans, a borrower using his or her paycheck as leverage to obtain cash. The customers are financially strapped, no surprise. They often fall into a cycle of debt, the costs for every $100 borrowed translating into an annual interest rate of 391 percent.

Lenders argue that such calculations amount to hyperbole. They stress that they provide a needed service in communities. The pertinent question isn’t whether the businesses should be permitted to operate. Rather, it involves whether the public sector should toughen oversight and regulation.

On Thursday, Policy Matters Ohio and the Housing Research & Advocacy Center reported the above information and other data charting payday lending in the state. The study noted that Ohio already sets rules for payday lenders, limiting, for instance, the maximum size of a loan ($800). In light of the larger role of payday lenders (reflecting, in part, an Ohio struggling economically) state lawmakers must examine closely the recommendations of the report.

Few would argue with taking steps to educate vulnerable consumers. Other banks would do well to follow KeyBank of Cleveland in establishing an enlightened presence in battered neighborhoods. Governments shouldn’t subsidize payday lenders, on one occasion routing $7 million in grants and loans.

Pennsylvania has banned payday lending. Other states, including Michigan and Illinois, are moving to strengthen their rules. Ohio should take seriously its duty to prohibit rank exploitation, usury, in a word. The Policy Matters Ohio and Housing Research & Advocacy Center report proposes a limit of 36 percent on the annual interest rate, echoing a federal law designed to protect military families. That is a good place for the Ohio discussion to start.

The Toledo Blade

By Robert Vitale

ONE harbinger of so-called payday loans is a languid economy in which poorer consumers consistently find themselves with too much month left at the end of the money.

How ironic, then, that here in Ohio one segment of the economy not still in a swoon is the business of lending cash at rates that would make the proverbial mafia loan shark blush with both envy and embarrassment.

A report by the watchdog groups Policy Matters Ohio and Housing Research and Advocacy Center points out that the number of check-cashing outlets in the state has grown wildly in the past decade and now outnumbers those of the three most-popular fast food restaurants.

Where there were six in Lucas County in 1996, for example, last year the number had mushroomed to 67. Ottawa County is one of just two counties in the state that have no licensed payday lenders.

They’re called payday loans because consumers in financial straits typically borrow relatively small amounts and repay it with their next paycheck, usually in two weeks.

But, much as the lenders would like the borrowers to believe, payday loans are not easy money. Just the opposite, in fact. Just check out the interest rates that can be levied under state law on loans of up to $800 – close to 400 percent on an annual basis. And terms can run up to six months, pushing the actual rate even higher.

Simply put, the advertised terms seem reasonable but they surely fall into the category of what used to be – and still should be – called usury.

As we pointed out in this space nearly seven years ago, usury is the practice of charging an unconscionable or exorbitant rate or amount of interest in a business transaction. In biblical times, usury was considered a moral offense.

Obviously, today’s state lawmakers, their vision clouded by lobbyists from the financial services industry, have lost sight of any obligation to determine right and wrong as it applies to business.

As we conceded in our 2000 editorial, no one is forced to take out a payday loan. And lenders are taking a very great risk doing business with people who can’t get money any other way.

Nonetheless, the penalty for poor judgment should not be unconscionably high interest rates that make it easy for an unwary borrower to fall impossibly behind in making payments.

This is a quaint concept, to be sure, in today’s laissez-faire business environment, but it’s a valid lesson that needs to be repeated from time to time until the legislature gets the message.

Some firms investing, but early results mixed
By Mark Niquette

Columbus Dispatch

Gary W. James doesn’t hedge when asked whether the sweeping tax cuts and other changes the state made to its tax code in 2005 are working.

Without them, nearly $4 million in equipment and more than 50 new workers at his Dynalab plant in Reynoldsburg would have gone to a nearby state or the South instead, he says.

“It’s working for us, there’s no question about it,” James, Dynalab’s president, said last week while standing in what had been an empty warehouse.

It now holds a humming assembly line with workers earning up to $20 an hour making circuit boards for commercial electricity meters.

Even so, nearly two years since the most-sweeping overhaul of the state’s tax code in generations, not everyone is as convinced as James.

Although manufacturers rave about the changes and business groups credit them with generating new investment in the state, some retailers and other companies say they are being hurt unfairly. Others worry about the effect on state spending for education and important services.

Although the goal was to make its business climate more competitive and improve the economy, Ohio continues to trail most states in leading economic indicators.

For example, the state has created 23,500 jobs since the tax changes took effect in July 2005, an anemic 0.4 percent increase. Only hurricaneravaged Louisiana, Michigan and Rhode Island were worse during that period, according to federal data.

Supporters and critics of what was billed as tax reform say that because the changes are still relatively new, are being phased in over five years and are difficult to measure, it’s too soon to reach firm conclusions about them.

But with tax cuts starting to limit the amount of revenue flowing to the state, few dispute that the changes are having a dramatic effect on key spending decisions that will be made in the coming months.

“It’s going to require very tough choices, and there almost inevitably will be pain felt by some as a result of the constraints that we’re facing with this budget,” Gov. Ted Strickland said of the two-year state budget he will present March 15.

The major bond-rating company Moody’s Investors Services also cited the tax changes and resulting effect on Ohio’s financial flexibility as one of the reasons it lowered the state’s credit outlook to “negative” last week.

“Ohio’s historically strong financial management capabilities will be tested,” Moody’s concluded.

After 40 years of tinkering with its tax code, state leaders decided in 2005 to overhaul it. They slashed income-tax rates paid by both individuals and businesses, eliminated what was seen as an onerous tax on business equipment as well as a loophole-ridden tax on business profits, and cut half of a previous penny increase on the state sales tax.

The idea was to make Ohio more competitive for new investment by reducing the tax burden on companies and individuals and encouraging business growth thereby improving the economy and job prospects for the state.

Jon Allison, chief of staff for former Gov. Bob Taft, said the state suffered from “sticker shock”: It had high rates and taxed investment and profits rather than consumption, which discouraged growth and hit manufacturers especially hard.

So the corporate taxes were replaced with a low-rate, broadbase tax on businesses’ receipts, changes that state officials are convinced lowered more tax bills than they raised and make Ohio more inviting for business to locate or expand.

A 70-cent per-pack increase in the state’s cigarette tax and better-than-expected collections of the new tax on business receipts have helped offset reduced revenue from the state’s sales tax and corporate-franchise tax, state data show.

Although net tax collections grew by 3.4 percent in the first full year after the tax changes took effect, state projections for the next two budget years starting July 1 call for revenue growth of 1.4 percent and 0.9 percent, respectively.

That’s less than inflation and well under a much-ballyhooed annual spending cap of 3.5 percent a year enacted last year. Projections suggest that by the time the changes are phased in completely by fiscal 2010, the state will have collected $3.5 billion less than it would have without the changes.

Supporters of the tax overhaul made it clear in 2005 that meaningful tax reform could not be accomplished without significant spending restraints, and they stand by that belief today.

They argue that although the changes mean less state revenue in the short term and Ohio’s economy continues to struggle, there will be long-term growth even if it’s not as fast as everyone wants.

People don’t make business decisions without careful study, said Ty Pine, state director for the National Federation of Independent Business/Ohio.

“Anybody that looks at reforms that are 18 months old and says, ‘See, as soon as we did it, businesses didn’t spring up,’ are not familiar with the business process. That is a multiyear process, and a lot of that stuff hasn’t been fully implemented.”

Ohio House Speaker Jon M. Husted, R-Kettering, and state manufacturers go a step further. They argue that the state’s economy would be in much worse shape if the changes weren’t made.

“We’ve stemmed the tide,” said Eric Burkland, president of the Ohio Manufacturers’ Associattract jobs and growth.

“It’s not a pretty picture,” Honeck said.

Rep. Steven L. Driehaus of Cincinnati, a member of Democratic leadership, said the jury is still out on the tax changes.

“Tax reform was a good idea,” he said. “I don’t know … whether this particular tax package was the appropriate tax reform.”

Still, although the tax changes were enacted by Republicans whose 16-year control over the governor’s office ended when Strickland, a Democrat, was elected last fall, Strickland has stood behind the changes while also vowing not to raise taxes.

He has called the results of tax changes “spotty” so far but says he doesn’t want to tinker with them until they have been in place long enough to be evalation, noting the state had lost more than 200,000 manufacturing jobs in the previous five years.

But critics point out that’s impossible to prove or disprove, and they’re concerned tax changes aimed at making the state more business-friendly will have the opposite effect.

Jon Honeck, an analyst with the Cleveland-based research group Policy Matters Ohio, is dubious about the power of tax cuts to spur economic growth and says having enough qualified workers and other factors play a much more important role.

Thus, he and others say a state forced to limit investment in education, worker training and other areas affecting quality of life because of reduced revenue only hurts its prospects to uated properly, with sufficient data.

“Much of what we think we know about the tax reform I believe to be anecdotal and based on limited or specific experiences,” Strickland said. “I think we need to give it more time so we have a broader view of the effects of this reform.”

Richard Levin, Strickland’s tax commissioner, said although the tax changes are costly in terms of income for government, he thinks they eventually will improve the economy.

“I don’t think we’ll look back and say it was the wrong thing to do,” Levin said. “It’s certainly good for business and it’s certainly what the business community has asked for.

“There’s no such thing as a free lunch; if you cut taxes, cut tax rates, you’ll have less revenue, and so you’ll have less money for programs, and that’s just the way it is.”

Dispatch reporter Jim Siegel contributed to this story.

The Toledo Blade

By Gary T. Pakulski

A new report says so-called “payday loan” offices are more common than fast-food restaurants in Ohio.

In Lucas County alone, their numbers have shot up nearly tenfold to 67 over the past decade, catapulting the county to fifth behind Franklin, Cuyahoga, Hamilton, and Montgomery counties, according to Policy Matters Ohio and the Housing Research & Advocacy Center.

“This is a very bad sign,” said David Rothstein, of Policy Matters. The spread of the offices, which charge up to 391 percent annual interest for small, short-term loans against a future paycheck, is an outgrowth of Ohio’s economic struggles of recent years.

An industry spokesman defended payday lending practices.

Customers typically pay $15 on each $100 borrowed for two weeks, said Lyndsey Medsker, of the Community Financial Services Association of America.

Although that may seem high, it is cheaper than penalties imposed by banks when a customer bounces a check, she said.

And that is the choice often faced by customers: take out a payday loan or write a check knowing that the account doesn’t have enough money to cover it.

“Customers look at their options and payday lending makes sense to them,” Ms. Medsker said.

Outside a Cashland Financial Services office in south Toledo yesterday, a steady stream of customers declined to comment and a manager ordered a reporter and photographer to leave.

Although industry advocates say payday loans are primarily for temporary dire straits, research shows that the average customer borrows from them up to nine times a year, said Mr. Rothstein, of Policy Matters, a nonprofit research group.

“There are a lot of people who are working poor who use these almost like a bank account.”

The spokesman for the industry group, which represents 60 percent of the nation’s 25,000 payday lending offices, said members have launched an education campaign to urge customers to use their services only in emergencies.

Also, they have liberalized policies for people who unable to repay the loans at the end of the two weeks.

One of the report’s key findings is that the centers, which in 1996 were found primarily in cities, have spread to small towns and rural areas.

“They’re everywhere,” the Policy Matters researcher said. Only two Ohio counties – Ottawa in northwest Ohio and Vinton in southeast Ohio – had no payday lending offices as of last year, the report found.

Although the establishments remain concentrated in large cities, less populated counties have a greater number per capita. In Williams County, the eight offices represented 2.04 payday lenders for every 10,000 people. The northwest Ohio county ranked 11th per capita.

Statewide, the number of payday lending offices rose nearly 15-fold between 1996 and 2006 to 1,562. That is more than the combined total of restaurants operated by the McDonalds, Burger King, and Wendy’s chains in Ohio, Policy Matters said.

In a typical payday shop, loans for up to $800 are made for 14 days.

They are called payday loans because that is the interval between paychecks at most employers.

At the end of the two weeks, borrowers either repay the loan or the lender cashes a post-dated personal check written by the borrower when the loan is made.

The Columbus Dispatch

By Paul Wilson

Fallout from struggles by domestic automakers will cost Columbus 52 manufacturing jobs. 

Keystone Powdered Metal Co. said yesterday that it will close its plant at 2100 Advance Ave. this year. Demand for the company?s products declined as U.S. automakers, Keystone?s primary customers, lost market share in recent years, it said.

Counting Columbus, Pennsylvania-based Keystone has four manufacturing operations. Paul Orr, Columbus plant manager, would not comment when asked why the South Side plant was picked to close.

Keystone makes gears, bearings and sprockets.

The news continues a yearslong pattern in Ohio of manufacturing job loses at companies that supply U.S. automakers. Faced with billions of dollars in losses and increasing competition, DaimlerChrysler, Ford Motor Co. and General Motors all are shrinking, said Jon Honeck, an analyst with Policy Matters Ohio, a Cleveland-based nonprofit research group.

“There?s a shakeup in the U.S. domestic auto industry,” Honeck said. “If a company is really dependent on the U.S. auto industry and isn?t able to diversify, it?s going to run into problems.”

International competition caused more Ohio manufacturing employees to lose jobs in 2006 than in any year in the past decade, Honeck wrote in a January report. Thousands worked for Delphi Corp., a GM spinoff that is undergoing massive restructuring.

Keystone operated its Columbus plant since 1987. Forty-three workers will lose their jobs April 20, with nine more leaving in May and June, the company said in a letter to government officials.

Keystone, founded in 1927, is a privately held company with more than $86 million in sales and more than 750 employees, the company Web site said. Keystone has manufacturing operations at its headquarters in St. Marys, Pa., and in Lewis Run, Pa., and Cherryville, N.C.

The Columbus plant had more than $15 million in sales, the Web site said.

The federal Earned Income Tax Credit (EITC) or Earned Income Credit (EIC) is a refundable tax credit available to some working individuals and families who earn less than $38,000. This credit currently does more to bring working families out of poverty than any other government program. An estimated four million families were lifted above the poverty level because of the EITC program in 2004. The EITC, which varies in value according to family size, marital status and income, can reach a maximum of $4,536 in the 2006 tax year.

In the 2004 tax season, more than 780,000 Ohio families received the EITC at an average credit of $1,729, which brought more than $1.3 billion in federal refunds to Ohio.1 Only seven other states receive more EITC dollars than Ohio, and Ohio accounts for approximately 3.6% of all the
nation’s credits.

In this analysis, Policy Matters Ohio uses data from the IRS and the Brookings Institution to breakdown how the EITC helps working families in Ohio. This data is presented for each state legislative district in Ohio. As the charts indicate, the EITC brings millions of dollars into legislative districts across Ohio. However, roughly one-third of those receiving the EITC purchase a Refund Anticipation Loan (RAL). For EITC recipients who pay for tax preparation, more than 60 percent purchase RALs.

Full Report

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Main EITC Page

The number of payday lending shops in Ohio catapulted from 107 locations in 1996 to 1562 locations in 2006, a more than fourteen-fold increase in a decade, according to this report from Policy Matters Ohio and the Housing Research and Advocacy Center. The report finds that payday lending shops are now more common than McDonalds, Burger King and Wendy’s restaurants combined in Ohio. Once concentrated in troubled urban centers, payday lending locations have now become ubiquitous across the Ohio landscape, appearing in all but two Ohio counties. The high-interest, high-fee loans pushed at these locations often lead borrowers into a destructive cycle of debt. The report ends with recommendations to rein in this disturbing form of credit.

Press Release

Executive Summary

Full Report

Housing Research and Advocacy Center

WKSU

By Bill Cohen

The number of payday lending stores in Ohio has exploded in the past decade. A new study confirms the trend. Critics say there’s good reason for the stores’ success – they’re making a mint off of desperate consumers by charging sky-high interest rates. But the payday lending industry is answering the criticism.

Click here to listen.

Columbus Dispatch

By Mark Niquette

The state needs to scrutinize the billions of dollars in tax breaks it allows and scrap those that aren’t needed or can no longer be justified, a study concluded last week.

Ohio provides tax credits and other deductions to encourage economic development or for other reasons. Those exemptions were estimated to reach $6.27 billion in fiscal year 2006 and $7.12 billion this fiscal year, although the value of many has changed since tax reform took effect in 2005.

The tax exemptions are a significant part of the state budget, and it isn’t clear why some breaks are still in effect, according to the report by Policy Matters Ohio, a research group from Cleveland. In other cases, the tax breaks benefit a single industry or company.

For example, brewers and beer importers have been getting a credit since 1963 for paying part of a beer and malt beverage tax a few weeks in advance, and those who purchase fractional shares on jet aircraft pay only a maximum of $800 in sales tax, the report said.

“There are legitimate, useful tax (breaks),” said Zach Schiller, Policy Matters Ohio’s research director and author of the report. “However, there is no reason why billions of dollars worth of foregone revenue should escape regular state scrutiny, any more than state spending for any other purpose should.”

Ohio Tax Commissioner Richard Levin said it could prove difficult to repeal many existing credits.

“If we can stand against creating new exemptions, I think that would be a great achievement,” he said.

Exempt from Scrutiny - Ohio tax credits, exemptions and deductions may sap up to a quarter of the states’ tax base, yet many of these tax expenditures receive no regular scrutiny apart from a biennial review of state revenue losses. Our new report, Exempt from Scrutiny: Tax Breaks in Ohio, takes a look at these often unexamined and costly breaks, and provides recommendations to eliminate unneeded tax expenditures and make the others more transparent. Read it here.

Borrowing Troubles - The number of payday lending shops in Ohio catapulted from 107 locations in 1996 to 1562 in 2006, a more than fourteen-fold increase in a decade, according to a new report, Trapped in Debt: The Growth of Payday Lending in Ohio from Policy Matters Ohio and the Housing Research & Advocacy Center. These stores are now more common than McDonalds, Burger King and Wendy’s restaurants combined in Ohio, and are in all but two Ohio counties. The high-interest, high-fee loans these lenders push can wreck havoc on borrowers and communities but we provide policy solutions that can help. Read more here. Learn about the Housing Research & Advocacy Center here.

EITC Gains, RAL Drains - The earned income tax credit brings millions of dollars into legislative districts across Ohio, but roughly one-third of those receiving the credit buy a costly refund anticipation loan. We use data from the IRS and the Brookings Institution to show how the EITC helps working families in every Ohio legislative district here. For more on the Cuyahoga Earned Income Tax Credit Coalition, go here.

Energy in Action - There were some incredibly impressive presentations made earlier this week at the summit for the Apollo Alliance for Good Jobs and Clean Energy from NY Senator Hillary Clinton, PA Governor Ed Rendell, MA Governor Deval Patrick, CO Governor Bill Ritter, or Apollo Alliance President Jerome Ringo. Now that’s renewable power!

Internships - Policy Matters seeks (alas, unpaid) interns for our Cleveland and Columbus offices to assist with research, media, outreach and advocacy on wages, economic development, energy, tax policy, and worker well being. Learn about Internships here.

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The quiz -
1. How much did the Ohio Department of Taxation estimate that tax expenditures would cost Ohio in the next fiscal year?

2. What’s the typical annual percentage rate of interest on a payday loan in Ohio?

3. How many people in my legislative district got the Earned Income Tax Credit and how many bought exploitative refund anticipation loans?

Click here for the answers.