Research & Commentary: Ohio Tax Reform, or Tax Shift?

Published April 21, 2015

In his 2016–2017 budget, Ohio Gov. John Kasich proposed a new tax plan that shares some characteristics with previous proposals: It reduces 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.

The main pillar of Kasich’s plan is its reduction in the state’s personal and business income taxes. The current plan would lower Ohio’s top marginal income tax rate to 4.1 percent over two years. The plan would nearly double the personal exemption on income tax returns to $4,000 for a family earning up to $40,000 a year and $2,850 for those earning between $40,000 and $80,000. These changes would reduce income tax receipts by 15 percent in 2015 and 8 percent in 2016, estimates based on a static model not accounting for economic growth effects. The reforms also would reduce corporate business taxes by forgiving the entire income tax bill for small businesses earning $2 million or less.

In an effort to offset some of the estimated revenue loss from the tax cuts, Kasich adds several new tax hikes. He wants to increase the state share of the sales tax from 5.75 cents on the dollar to 6.25 cents and apply the tax to a wide range of additional services. This would give Ohio the second-highest base rate among its neighbors, second only to Indiana.

The component with the potentially strongest negative effect on Ohio’s economy is the increase in the gross receipts tax, known as the Commercial Activities Tax (CAT), from 0.26 percent to 0.32 percent. The Tax Foundation argues the CAT is the single worst element of Ohio’s tax code. It increases the cost of consumer goods, and raising the rate would make a bad situation even worse, slowing economic growth while hitting small businesses the hardest. Gross receipts taxes apply to all transactions, including intermediate business-to-business purchases of supplies, raw materials, and equipment, regardless of the firm’s profits or losses. The CAT also lacks transparency, making it difficult for consumers to know how much tax they are paying.

Kasich’s proposal would increase the cigarette tax from $1.25 to $2.25 per pack and place a new excise tax on e-cigarettes, which are considered less harmful to individual and public health 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 would raise 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.

Although the net result of Kasich’s plan would be a small reduction in taxation, the Buckeye Institute argues it represents a shift of tax burden from individuals to businesses: “While the Kasich budget reduces income taxes with a focus on small businesses and tax rate reductions, the overall plan adversely affects Ohio businesses by shifting the tax burden from individuals to the business sector. Individual income taxes decline by a fifth in the next fiscal year, but the commercial activity tax increases by 80% and the sales tax increases by 15%. Though a net tax cut, it is more of a tax shift.”

Kasich’s income tax changes would leave more money in taxpayers’ pockets, but the other tax increases would offset those benefits by raising prices of goods and services. Instead of simply shifting the tax burden from one group to another, Ohio should focus on reforms that keep tax dollars in the pockets of all taxpayers while creating new, reasonable limits on spending.

The following documents examine Kasich’s tax reform proposal.

One Cheer for the Budget, but Improvement Needed 
Rea S. Hederman Jr., Greg R. Lawson, Tom Lampman, and Joe Nichols of the Buckeye Institute argue Ohio Gov. John Kasich’s tax reform plan and budget contain some positive and long-overdue pro-growth reforms, such as large reductions in the personal income tax, but many elements of it will hold back the state’s economic growth. 

Ten Principles of 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  
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
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  
Barry W. Poulson and Jules Gordon Kaplan used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004 and found higher marginal tax rates inflict significant damage on economic growth. 

The Potential Effect of Eliminating the State Corporate Income Tax on 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. She concludes low state corporate income taxes spur investment and employment in the state. 

Research & Commentary: 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 
The Tax Foundation explains why gross receipts taxes (GRTs) are poor tax policy. The author notes GRTs 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   
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 
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 Institute Research Fellow Isaac Orr argues states without severance taxes 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, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database at

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