PMO Says REMI Model Incomplete and Misleading

Hannah Report - May 6, 2005
   

The Hannah Report

Policy Matters Ohio (PMO) said an Ohio Department of Development (ODOD) analysis of Gov. Bob Taft’s tax reform plan is incomplete and misleading.

According to Jon Honeck, Ph.D. and Zach Schiller, PMO’s analysis team, the REMI report — which has been used by researchers for many years and cost Ohio $154,000 — is an incomplete analysis of the economic effects of the Taft tax plan and does “not live up to its billing, and fails to establish that the plan will significantly boost Ohio’s economy.”

PMO, a nonprofit, nonpartisan policy research institute, acknowledged that some of elements of the tax proposal would generate 43,250 new jobs over five years and boost state output by $2.5 billion. But closer scrutiny reveals that the study does not take into account massive cuts in state spending, or alternative tax increases, that will be required to make up for the revenue shortfall of about $2.8 billion in 2010, the fifth and final year of the tax reform plan’s phase out period.

In light of the state’s constitutional requirement to balance its budget, Schiller and Honeck forecast that spending cuts or tax increases are a certainty with the dramatic revenue shortfalls predicted by the REMI study. The PMO analysts say the tax increases and spending cuts that will be required in the future also will have an impact on jobs and economic output and could wipe out gains resulting from tax cuts.

Highlights of the PMO findings are as follows:
• The economic impacts shown are relatively modest, given the existing size of Ohio’s economy, and the REMI study does not consider other important taxes that are part of the governor’s plan.
• The tax plan would generate a reduction in tax revenue of $3.06 billion in FY10, when the plan would be fully implemented.
• The positive effects of the tax changes would generate revenue of about $216 million, which means that the tax changes will not pay for themselves over time.
• The overall result would be a net reduction of more than $2.8 billion in Ohio tax revenue in
FY10.
• Because the report does not show the net change in tax revenue beyond FY10, it is unclear if the shortfall is ever reversed.
• REMI is honest and straightforward about its omission in not reviewing the economic effects of plugging this revenue gap, with virtually every chart noting that the numbers are shown without offsetting taxes or government expenditure changes, which further debilitates its estimates for Ohio’s citizens and legislators.
• Given its failure to consider the overall revenue gap, the REMI analysis projects that there will be increased state and local government spending on the economy as a result of the
governor’s proposed tax plan.
• In a scenario in which the proposed income-tax cuts will lead to income and consumption
growth, adding to the growth of Ohio-based industries, labor force and population, the study also predicts that additional government services will be needed to maintain the existing level of government service commitments to Ohioans.
• Although state and local governments would need to expand their budgets to satisfy their new citizens, the findings are speculative because government may not have the revenue to respond to the additional demands for services.
• Tax cuts in the REMI study result in government spending increases, while conversely tax
increases (such as the proposed Commercial Activity Tax on business receipts) result in
lower government spending. This result, though it may be reasonable within the context of the model, is oblivious to the reality that a tax cut will reduce the immediate revenues available and inevitably result in spending reductions, unless there is a rainy day fund the state can use.
• If Ohio’s workforce is not adequately educated and trained, the economy is unlikely to grow at an acceptable rate. The long-term damage from under-investment in schools, public health and infrastructure will make the state unattractive for business, not to mention its impact on citizens.
• The reduction in state spending that would result from the tax cuts, absent other new revenues, also could trigger additional negative spending effects, such as in Medicaid, the state’s largest program expenditure, and likely would result in a reduction in federal aid,
multiplying the negative effect on the Ohio economy.
• Even aside from the major omission in the REMI study, the results show relatively small effects on the Ohio economy, even when the tax plan is fully phased in five years from now.
• The analysis also does not include significant elements of the governor’s tax plan or the version passed by the House in April. Four elements of the governor’s plan that are omitted would produce a $567 million net fiscal gain for the state in FY10: the increase in the kilowatt hour tax ($170 million), the elimination of the 10 percent commercial and industrial property tax rollback (a $365 million spending reduction for the state but a local property tax increase for business), the imposition of a state-level real estate transfer tax ($40 million) and the elimination of the sponge portion of the estate tax.

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