At a hearing of the Ohio House Finance & Appropriations Committee last week, Joe Testa captured the thinking of John Kasich on the state economy: “High income tax rates are toxic to job creation. The best environment for job creation is one in which there is no income tax.”
The state tax commissioner appeared before the panel to explain a “fundamental shift” in tax policy proposed in the governor’s new two-year state budget plan. Kasich wants to lower the rate and broaden the base of the state sales tax, applying the levy for the first time to a slew of services. He has renewed his pursuit of a modest severance tax on oil and gas drilling.
At the core is a reduction in state individual income tax rates, by 20 percent during the next three years, taking the top rate from the current 5.92 percent on income above $204,200 a year to 4.74 percent.
All of the other moves appear designed to support the income tax reduction. The severance tax would generate new revenue to cover part of the loss. So would the reshaped sales tax. In the end, the combination of tax changes would reduce state revenues by $884 billion for the biennium.
How key is the tax cut?
On Thursday, Greg Moody, the director of the Governor’s Office of Health Transformation, warned the same House committee that failing to expand Medicaid would cost the state $400 billion the next two years. He argued that would require spending cuts for schools and local governments.
No, the tax cut wouldn’t be narrowed to make up the difference.
The governor makes a persuasive case for a sales tax that more accurately reflects an evolving economy, from goods to services. The severance tax seeks a reasonable share of the bounty from natural resources. His argument for an income tax reduction, even erasing the tax, to unleash growth lacks persuasive evidence.
In the 1990s, the top income tax rate reached 7.5 percent under Gov. George Voinovich, yet the state had growth and job creation that would draw loud cheers today.
Ohio reduced income tax rates by 21 percent starting in 2005, combined with reductions in business taxes lowering state revenues by $2.5 billion a year. Yet this hardly has resulted in a big leap forward, the state lagging behind the national economy and average growth for the Great Lakes region.
An argument for taking income tax rates even lower? States with higher or comparable top income tax rates have been expanding faster than Ohio in recent years, for example, Minnesota, Iowa and Oregon.
All of this follows research from the Cleveland Federal Reserve Bank, not an organization pushing an ideology. It took a long view of how states sustained a strong economic performance, concluding that levels of education and innovation were most telling. The study found that taxes did not play a decisive role.
Recall why Ohio enacted an income tax in the early 1970s. Gov. John Gilligan campaigned on the slogan of “we can do better.” He cited such things as the state share of public school funding falling from 40 percent to 29 percent, some schools closing temporarily. He pointed to the neglect of the environment and the poor and vulnerable. He won bipartisan and business support for the income tax.
Voters rejected an appeal effort by a margin of 2 to 1.
The argument for adequate funding resonates today. Many school districts are struggling with the $1.6 billion spending reduction in the current budget. In his new plan, the governor still proposes to leave them short.
Policy Matters Ohio, a Cleveland-based think tank, recently charted the decline the past decade in need-driven aid for college students in Ohio. The erosion adds to the obstacles faced by students from lower-income households, the state with one of the highest tuition rates in the country.
Obviously, an individual income tax isn’t required to raise sufficient money. It belongs in the mix of revenue sources, ideally in a leading role, with graduated rates, because of fairness. No less than Adam Smith has made the argument for a progressive system, those who have benefited most paying a larger share.
The Institute on Taxation and Economic Policy recently calculated that in 2010 the top 1 percent of Ohio families paid an average 8.1 percent of their income in state and local taxes. Those at the bottom fifth paid 11.6 percent. The middle? An average 10.6 percent.
Expand the sales tax while lowering income tax rates as the governor wants, and the trend worsens.
Policy Matters Ohio did the arithmetic on the 2005 income tax cuts, the top 1 percent enjoying an average reduction of $9,500 a year. It performed the same for the governor’s tax package, arriving at an average tax cut of $10,369 — or nearly $20,000 annually for the wealthiest Ohio households.
Those in the middle would emerge from the 2005 cuts and the governor’s proposal with an average tax reduction of $189. At the bottom, they would face a tax increase of $44 a year.
In an era of increasing income inequality, the income tax provides a tool for easing disparities. It also serves as a fair and effective way to raise money for shared priorities, items essential to the state economy, that add to the quality of our lives. Too bad the governor wants to narrow its role, even get rid of it.
Douglas is the Beacon Journal editorial page editor. He can be reached at 330-996-3514, or emailed at mdouglas@thebeaconjournal.com.
