Policy Matters Blog
Kasich budget exposes tax cut fallacy
February 8th, 2017
Economic forecast shows Ohio trails nation in growth
Are Ohio’s tax policies working? Governor John Kasich’s budget proposal provides an answer, though it’s one he won’t like. By every major indicator, Ohio will underperform the nation over the two-year budget period beginning July 1 (Fiscal Years 2018 and 2019), according to the economic forecast used to put the budget together. We’ve had more than a decade of tax cuts. We’ve raised taxes for poor and middle income workers while slashing them for the wealthiest. And we’ve shifted to have the sales tax replace the income tax as the state’s top source of tax revenue. All of these changes, in the name of growth, yet Ohio is not even an average performer in economic and income growth.
The forecast by the firm IHS shows that Ohio will trail behind the United States in output, personal income, nonfarm employment, unemployment rate and retail and food service sales during the next budget (see pages B-3 and B-4 of the governor’s proposal). It projects that U.S. personal income will grow by 5.2 percent a year during the two-year budget period, while Ohio personal income will grow only 4.2 percent. Wage and salary disbursements are expected to grow by 5.4 percent for the nation and just 3.8 percent in Ohio. Figures show that Ohio output adjusted for inflation grew more than the national average in just one year – 2015 – but otherwise the state trails behind in every indicator shown between 2014 and 2019. The state relies on the IHS forecast and another by the Governor’s Council of Economic Advisors as the foundation for its revenue forecasts, and Budget Director Timothy Keen said in testimony last week that the two “were in very close agreement for this budget.”
The graphs below depict the budget numbers from IHS in two key measures, personal income and employment growth by fiscal year:
In his testimony, Keen noted the forecast for slow job growth and blamed it on slow population growth, more older workers retiring, and an unemployment rate that puts us very close to full employment. But these are inadequate reasons. Ohio has a large number of workers who are not participating in the labor market – we have 265,000 fewer workers in the labor force than when the recession began almost a decade ago. It’s not as if all of those workers have retired. According to U.S. Census survey data analyzed by the Economic Policy Institute, the share of Ohioans between 25 and 54 participating in the labor force was 82.0 percent last year, compared to 84.7 percent in 2007. In fact, a stronger economy would pull more of these prime-aged workers into the labor force. And as anyone familiar with U.S. history knows, people will move from elsewhere when jobs abound – after all, how did Ohio attract so many immigrants from Europe and the U.S. South in decades gone by? Our factories, of course, were hiring.
The importance of state and local taxes to jobs and economic growth is often overstated. But backers of Ohio’s income-tax cuts have long argued that they believe they are an important factor. The economic forecast in the budget shows that the tax cut, tax shift policy has failed. Instead, Ohio should be reinvesting in our people.