Early in 2015, Ohio Gov. John Kasich (R) proposed a comprehensive new tax plan in his 2016–17 budget that would reduce income taxes while increasing sales taxes, the severance tax on shale oil and natural gas drilling, the excise tax on tobacco and e-cigarette products, and the Commercial Activity Tax. In response to this plan, the Ohio House crafted a substitute bill for the state budget that removes many of Kasich’s tax increases while focusing on pro-growth tax policies.
The main pillar of Kasich’s plan was a reduction in the state’s personal and business income taxes. Kasich’s plan would lower Ohio’s top marginal income-tax rate to 4.1 percent over two years. The House budget would reduce tax rates across all nine of the state’s progressive tax brackets by 6.3 percent, and the state’s top marginal tax rate would decrease from approximately 5.3 percent to 4.9 percent. This plan represents an overall $1.2 billion tax cut, $700 million more than Kasich’s proposal. Another proposal that eliminated taxes on small-business income was removed, but the House plan would make the current 75 percent deduction on small business income permanent.
In an effort to offset some of the lost revenue from the tax cuts, Kasich adds several new tax hikes. First, the plan would increase the state share of the sales tax from 5.75 cents on the dollar to 6.25 cents while expanding the base to include a wide range of new services. This increase would give Ohio the second-highest base rate among its neighbors, second only to Indiana. The House removed this increase. Although the shift away from income taxes and toward consumption taxes is a good idea, the increase Kasich proposed created a net tax increase.
The component of Kasich’s plan that could have the strongest negative effect on Ohio’s economy is the increase in the gross receipts tax, known as the Commercial Activities Tax (CAT). Kasich’s plan would raise the CAT rate from 0.26 percent to 0.32 percent. CAT increases the cost of consumer goods; raising the tax rate would make a bad situation even worse, slowing economic growth while hitting small businesses the hardest. The House wisely removed this tax from its budget plan.
Kasich’s proposal would also increase the cigarette tax from $1.25 to $2.25 per pack and place a new excise tax on e-cigarettes, which are generally considered less harmful than traditional cigarettes. Sin taxes are problematic because they are unreliable and encourage unsustainable increases in government spending while placing an unnecessary burden on lower-income taxpayers.
Kasich’s proposal also increased the state’s severance tax on shale oil and natural gas drilling from 4.5 percent to 6.5 percent. This will suppress the state’s growing energy production and development through hydraulic fracturing and horizontal drilling, and it will increase energy prices for consumers. The Buckeye Institute argues the tax hikes violate the principle of tax equity because they would tax shale drillers’ revenues at a much higher rate than those of other businesses. The House budget removed both of these tax hikes.
The Buckeye Institute notes the House plan also calls for spending almost $777 million less from the General Revenue Fund than Kasich’s budget, a 19 percent reduction. The House budget also attempts to reduce health care costs by seeking a federal waiver to allow health savings accounts in Medicaid coverage and to reduce labor costs by disallowing the requirement of expensive and inefficient project labor agreements for state public works projects.
The House budget plan removes many of the anti-growth tax hikes from Kasich’s plan while keeping the tax cuts that would help make the state more competitive in the long run. Kasich’s budget would simply shift the tax burden from one group to another. Ohio should focus on tax reform that keeps tax dollars in the pockets of all taxpayers while creating new, reasonable limits on spending. The House plan is a better deal for Ohio taxpayers.
The following articles examine both tax reform proposals from multiple perspectives.
Ohio House Budget is a Big Step Forward
https://heartland.org/policy-documents/ohio-house-budget-big-step-forward
Greg R. Lawson, Tom Lampman, and Joe Nichols of the Buckeye Institute argue the budget proposal unveiled by the Ohio House of Representatives makes significant growth-oriented improvements to Kasich’s proposal and advances Ohio in four key areas: pro-growth tax policy, Medicaid reforms, a spending reduction, and labor reforms.
Ohio State House Republicans Push A Sound Tax Reform Agenda
https://www.atr.org/ohio-state-house-republicans-push-sound-tax-reform-agenda
Will Upton of Americans for Tax Reform (ATR) argues the Ohio House budget proposal and is a serious improvement upon the original tax plan contained in the state budget. Upton addresses many of the problems ATR had with Kasich’s budget proposal.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Rich States, Poor States
https://heartland.org/policy-documents/rich-states-poor-states-7th-edition
The seventh edition of this publication from the American Legislative Exchange Council and economists Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth
Using regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004, Barry W. Poulson and Jules Gordon Kaplan found higher marginal tax rates inflict significant damage on economic growth.
The Potential Effect of Eliminating the State Corporate Income Tax on Economic Activity
http://heartland.org/policy-documents/potential-effect-eliminating-state-corporate-income-tax-economic-activity
Laura Wheeler, a senior researcher at the Fiscal Research Center of the Andrew Young School of Policy Studies, summarizes studies of the effect of state corporate income tax changes on economic activity. Wheeler then uses the results of those studies to estimate the economic effect of eliminating a state’s corporate income tax, concluding low state corporate income taxes spur investment and employment in the state.
Research & Commentary: Gross Receipts Taxes
http://heartland.org/policy-documents/gross-receipts-taxes
This Heartland Institute Research & Commentary examines the effects of gross receipts taxes on businesses and shows their regressive effect on consumers.
Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
http://www.taxfoundation.org/research/show/2061.html
The Tax Foundation explains why gross receipts taxes are poor tax policy: they lead to harmful “tax pyramiding,” distort companies’ structures, and damage the performance of state and local economies.
Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigovian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive and preventive lobbying.
Research & Commentary: Severance Taxes
http://heartland.org/policy-documents/research-commentary-severance-taxes
Severance taxes are levied when landowners sell nonrenewable resources such as oil, natural gas, iron, copper, and other natural resources for extraction. These taxes are typically assessed on the gross value of the resource and are paid by the party extracting the resource. In this Research & Commentary, Heartland Research Fellow Isaac Orr examines severance taxes and argues states without the tax should recognize the policy as a competitive advantage and resist the temptation to impose them.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
