Policy Matters Blog
Tax cuts help create Ohio’s revenue crunch
January 25th, 2017
Kasich warns of a tight budget, but it’s partly due to his tax policies
Governor John Kasich and Budget Director Tim Keen have been warning for some time now that the state budget they will propose in the next week will be a tight one. State tax revenues have underperformed expectations for three months in a row, trailing projections by nearly $300 million or 2.7 percent in the last half of 2016. Kasich even told members of the House last month that the state was “on the verge of a recession.”
They seem to be forgetting something, though: The major tax cuts Kasich and the General Assembly have approved in recent years. When Kasich and Keen plead poverty in the upcoming budget, they should be reminded that Ohio has the money – we just gave it away in tax cuts, mostly to the affluent.
In 2015, the General Assembly approved a two-year budget lasting through this June that cuts taxes by nearly $1.9 billion. When legislators approved those cuts, Policy Matters Ohio asked a respected national policy group with a model of Ohio’s tax system to review them. The Institute on Taxation and Economic Policy found that the top 1 percent on average would see an annual tax cut of more than $10,000. For the middle fifth of Ohioans, the savings averages $20. And for the lowest-earning 20 percent, who made less than $20,000 in 2014, it amounted to an average tax increase of $20. Most Ohioans, in short, are getting little or nothing from these tax cuts.
The tax cuts included an across-the-board 6.3 percent reduction in income-tax rates and an expansion of a tax exemption for business owners. Since the Ohio legislature approved these tax changes in June 2015, Ohio’s jobs have grown 1.9 percent, compared to 2.5 percent growth across the country. The record is even worse if you look back to 2005, when big tax cuts were approved under Governor Bob Taft. Since then, Ohio jobs have grown by 1.9 percent. The state’s job numbers barely changed between June 2005 and 10 years later, a period that included the recession and recovery. By comparison, since 2005, U.S. jobs grew by 8.5 percent. Altogether, tax changes since 2005 have reduced revenue by $3 billion a year.
Even before state lawmakers approved the 2015 cuts, Ohio’s overall state and local taxes were slightly lower than average. According to recently released figures from the Ohio Department of Taxation based on U.S. Census data, Ohioans paid $4,207 per person in such taxes in Fiscal Year 2014, compared to the U.S. average of $4,675. That worked out to 10.4 percent of personal income in Ohio, versus a U.S. average of 10.6 percent.
Revising and modernizing our tax system will take careful thought. But cutting state taxes hasn’t made Ohio a leader in job creation – while it has reduced our ability to invest in things that will make our state better and more prosperous. Whether it’s preschool or college, we need our kids to be able to get the education they need, yet we have underinvested in these and other crucial services. Various factors are probably causing Ohio’s weak revenue performance, and a number of other states also have been experiencing softer-than-expected revenue growth. Whatever the reasons, they shouldn’t be an excuse to cut needed programs when our political leaders made a policy choice to slash the revenue we need to pay for them.
Zach Schiller is research director at Policy Matters Ohio