Ohio Gov. John Kasich in March began a renewed push for tax reform in 2014, following up on the state’s 2013 tax reforms, which lowered income taxes while increasing sales taxes. Kasich is proposing to lower income taxes across all brackets by 8.5 percent over the next three years.
Lowering the state income tax is a positive step, but Kasich’s proposal fails to reduce Ohio’s high number of tax brackets (nine) or reform the municipal income tax system, which is currently a jumble of local rules and forms.
Kasich’s proposal also would increase the state’s earned income tax exemption (EITC) for low-income Ohioans, raising its benefit from 5 to 15 percent of the federal credit. The EITC is a very effective method of combating poverty, far more effective than an increased minimum wage. In addition, Kasich’s proposal would increase the income tax personal exemption from $1,700 to $2,700 for Ohioans earning less than $40,000 annually and from $1,700 to $2,200 for those with annual incomes between $40,000 and $80,000.
The component of Kasich’s plan that is receiving the most criticism from tax reform and free-market groups is the increase in Ohio’s gross receipts tax, known as the Commercial Activities Tax (CAT). Kasich’s plan would raise the CAT rate from 0.26 percent to 0.30 percent. The Tax Foundation says the CAT is the single worst part of Ohio’s tax code. The 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. 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; it makes it difficult for consumers to know how much tax they are paying.
Kasich’s proposal also would increase the cigarette tax from $1.25 to $1.85 per pack and place a new excise tax on e-cigarettes, 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 would raise the state’s severance tax on energy production to 2.75 percent of producers’ gross receipts. 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. Kasich’s plan attempts to balance these new taxes by exempting start-up drilling costs at $8 million of gross receipts per well and not taxing small conventional gas producers (less than 910,000 cu.ft./quarter).
On the whole, Ohio consumers and the economy would be harmed more than helped by Kasich’s plan. The income tax changes would leave more money in taxpayers’ pockets, but the other tax increases would more than offset those benefits. Instead of simply shifting 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 following articles examine Gov. Kasich’s tax reform proposal from multiple perspectives.
Ohio Tax Reform in 2014: Framing the Conversation
In this Fiscal Fact article, Scott Drenkard of the Tax Foundation argues the new Ohio tax proposals are a “somewhat disjointed attempt at tax reform that lacks principle or a unifying theme.” He lists the current proposals being considered in 2014 and options for improving them.
Governor Kasich’s Tax Plan Less than Inspiring
Will Upton of Americans for Tax Reform identifies flaws in Kasich’s plan and argues, “Gov. Kasich should work with lawmakers in Columbus to craft a pro-growth tax reform measure, consolidating income tax brackets while reducing the tax burden and simplifying the mess that is the municipal income tax regime.”
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.”
Rich States, Poor States
The sixth 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.
Research & Commentary: Ohio Municipal Income Tax Reform
In this Research & Commentary, Heartland Institute Senior Policy Analyst Matthew Glans examines another, more positive tax reform being considered in Ohio: municipal income tax reform. Glans points out, “Although critics of the reforms express concern the new system would shortchange communities that rely on local income tax revenue, the bill does not prohibit local governments from changing their tax rates. The ideal reform would be to eliminate or at least lower income tax rates, but the proposed reforms would be a significant step toward simplifying Ohio’s tax system and making the state more economically competitive.”
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.
Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
John Nothdurft, government relations director at The Heartland Institute, identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits.
Institute Brief—No Income Tax: The Key to Economic Growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
State Income Taxes and Economic Growth
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. Regression analysis is used to estimate the impact of taxes on economic growth in the states from 1964 to 2004. The analysis reveals higher marginal tax rates inflict significant damage on economic growth.
Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
The Tax Foundation explains why gross receipts taxes are poor tax policy, noting GRTs cause harmful “tax pyramiding,” distort companies’ structures, and damage 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, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian 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 preventive and defensive lobbying by the affected industries.
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they write.
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 and other tax topics, visit The Heartland Institute’s Web site at http://heartland.org, Budget & Tax News at http://news.heartland.org/fiscal, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].