June 26, 2009
June 26, 2009
Four years ago, the Ohio General Assembly ap proved the biggest overhaul of Ohio's tax system in a generation. The income tax and business taxes were slashed in overall tax cuts worth more than $2 billion a year. The idea was to spur investment and jobs. As legislators meet in Columbus to decide how to balance the state budget, it's a good time to ask: Has tax reform worked?
In a word, no. If Ohio's total non-farm payroll employment growth since June 2005 had matched the nation's, the state would have had 228,000 more jobs in May 2009. Manufacturing jobs, too, have suffered compared to the country as a whole. Only two other states had lower growth in inflation-adjusted economic output between 2005 and 2008. And the gap between personal income per person in Ohio and the nation increased from $3,018 in 2005 to $4,240 in 2008.
Clearly, the tax changes have not improved Ohio's national standing.
Ohio should reverse course and increase taxes, based on the ability to pay.
The state must balance its budget. Thus, every dollar of tax cuts also means a dollar in reduced spending. During the discussion of a national stimulus plan earlier this year, most economists agreed that spending boosts the economy more than tax cuts. Tax cuts can be saved or spent outside the state instead of recirculated in the local economy. In fact, spending cuts will hurt Ohio's economy more than raising taxes.
It's not really a surprise that the tax cuts didn't bring an economic renaissance. State and local taxes aren't the main factor in business decisions. Overall, states with relatively high tax levels - and thus bigger investments in public services that businesses need, like education - do as well economically as those that keep taxes low.
Obviously, the deep recession has plunged Ohio into financial hot water. However, the $2 billion annual loss of revenue from the tax cuts is an important reason why we can't provide needed services.
Gov. Ted Strickland's proposed cuts would touch the lives of most Ohioans. We'll see sharp cuts to libraries, community health centers, public transit. Meals and transportation for seniors, early childhood education, alcohol and drug treatment and prevention will be slashed. Access to some state forests and campgrounds will be limited. We'll sacrifice more than $400 million in federal Medicaid money because the state is cutting its own spending. Scholarships for college students, services for abused and neglected seniors, investigations of child abuse: All these and more will be reduced.
Meanwhile, Ohio is cutting its taxes this fiscal year by 2½ times more than any other state in the country.
Those who say we should give the tax reform more time should be asked: Why should Ohioans experience drastic cutbacks in public services to test their theory, incorrect so far, that tax cuts will fuel an economic revival?
Ohio needs more revenue to pay for today's needs, invest in the future and provide a stable source of funding in the future. Legislators need to reverse key elements of the 2005 tax changes.
They should restore the previous 7.5 percent top rate of the state income tax on income over $200,000 a year, first enacted under Gov. George Voinovich. This would affect fewer than 2 percent of Ohio taxpayers and generate more than $400 million a year. Overall income-tax rates should be rolled back to 2007 levels, while a state earned income tax credit should be created to help low- and moderate-income taxpayers.
Businesses pay a far lower share of Ohio's taxes than they did a generation ago. The General Assembly should restore Ohio's corporate income tax, so that companies pay taxes on profits as they do in all but a handful of states.
In addition, legislators should take steps to eliminate tax loopholes. Sales tax is not paid now when someone employs lobbyists or debt collectors; it should be. Payday lenders and mortgage brokers should pay the same tax rate banks do. Instead of adding and expanding tax breaks, as both the House and Senate are poised to do, we should eliminate some of the $7 billion worth of exemptions and credits that already cram the state's tax code.
Each of Ohio's last five elected governors, Republican and Democrat, have approved major tax increases when times demanded it, with bipartisan support from the General Assembly. Our governor and legislators should do the same now.
Schiller is research director of Policy Matters Ohio.
1 of 22