Friday, February 16, 2007

Exempt From Scrutiny

Ohio grants $7 billion a year in tax exemptions. What does the state get for all this relief?

Editorial
Akron Beacon Journal

Zach Schiller of Policy Matters Ohio has performed a favor for Ohioans. He has taken a hard look at the tax exemptions, credits and deductions that lawmakers have carved into the state tax code. The title of the report tells the story: "Exempt From Scrutiny: Tax Breaks in Ohio." For all the concern expressed at the Statehouse about taxes, spending and the economy, these elements of the state budget receive little attention. Few questions are asked about their effectiveness, whether the state ever or still benefits.

Might that reflect the relatively small amount of money at stake? Hardly. The state Department of Taxation projects these "tax expenditures" will total $7.12 billion in this fiscal year. That compares with annual state tax revenue of $21 billion.

In other words, this is a huge item.

Schiller lingers appropriately on the notion of "expenditures," citing the words of the taxation department explaining that the tax breaks have the same impact as direct spending. They tap taxpayers, and they reduce the money available for other priorities. They deserve regular and close examination from the governor and lawmakers.

Some of the tax breaks make obvious sense, for instance, the personal exemption for individual income taxes (totaling $620 million a year). The largest exemption involves relief from the sales and use tax for machinery, equipment, supplies and fuel used in manufacturing. Economists generally favor the exemption. Yet, Schiller notes the legislature last examined the provision in 1990. In view of the money at stake, roughly $2 billion a year, a more timely review is warranted, if nothing else than to ensure that the exemption works most effectively.

In 1963, brewers and beer importers received a credit for paying beer and malt beverage taxes a few weeks early. Does that exemption serve Ohio today? In 2003, lawmakers granted relief to those buying a partial share of a jet aircraft. All together, the buyers pay just $800 in sales tax. If 16 individuals purchased a Gulfstream 550, each would pay $50. The full amount of sales tax? Around $144,000 each.

How exactly do Ohioans as a whole benefit?

An argument can be made for tax exemptions aiding economic development. Schiller wisely advises care in preventing relief that serves a narrow interest more than anything else, causing others in an industry or sector to be treated unfairly.

The state dumped the corporate franchise tax, in part, because it was riddled with exemptions, offering the worst of all taxing worlds: high rates and a narrow base. The new commercial activity tax has the virtue of a low rate and a broad base. Unfortunately, lawmakers already have carved exemptions. They must resist the impulse, knowing that a break for one means higher taxes for others.

To his credit, Gov. Strickland has pledged to examine the range of economic incentives offered by the state. Schiller points out that Virginia and other states have begun to provide frequent and detailed analyses of such tax relief. Strickland and lawmakers would do well to take the cue. When it comes to the state economy, Ohio must do all it can to act smartly. That includes keen and regular evaluation of its many tax exemptions, credits and deductions.