As a candidate, John Kasich pledged to cut individual income tax rates. In his new two-year state budget plan, the governor proposes to deliver in a big way, calling for a 20 percent across-the-board reduction, taking the top rate from the current 5.925 percent to 4.74 percent during the next three years. He argues the step is necessary to spur the state economy. “I mean, it just follows: lower cost, better economic growth,” he declared at the unveiling of the budget plan on Monday.
The thinking drives his plan to reduce further income taxes paid by small businesses, providing the owner with a 50 percent deduction on annual income up to $750,000.
Does it follow? This would be the second reduction in state individual income tax rates in recent years. In 2005, then-Gov. Bob Taft and state lawmakers launched a 21 percent tax cut, along with a lower tax burden on businesses. By 2009 and through 2011, the country out of the recession, the state’s growth rate still lagged behind the Great Lakes region, and many states with comparable or higher income tax rates. Consider Wisconsin and Minnesota, or North Carolina, Iowa and Oregon.
In the early 1990s, then-Gov. George Voinovich and lawmakers raised the top rate to 7.5 percent, the state economy prospering the rest of the decade. The Cleveland Federal Reserve Bank has produced research showing that tax rates aren’t the significant factors that education and innovation (through research) are.
The governor didn’t stop there in reshaping state taxes. He proposes to extend the state sales tax to a wide range of services, from lobbyists to travel agents, from engineers to cable television. The move makes sense, the economy having changed, services playing a larger role. Here is a good example of broadening the base to achieve a lower rate. The governor wants the sales tax to fall from 5.5 percent to 5 percent.
In making the shift, the state would generate an additional $3.1 billion for the biennium, offsetting a share of the income tax reduction, resulting in a net tax cut of $880 million over the two years.
Yet sound tax reform requires more than a broader base and lower rates. The mix of taxes must be well balanced. A concern about the governor’s plan is the increasing reliance on a regressive sales tax, as wealthier Ohioans benefit more from the income tax reduction. In the end, a tax system also must raise sufficient resources to fulfill the responsibilities of the government. Measure the proposed tax cuts against the diminished funding for public schools and college students struggling with high tuition and mounting debt. To thrive, a state economy requires adequate investment.