With the governor’s two-year state budget plan comes another document, the Tax Expenditure Report. It is an accounting of the many tax credits, exemptions and exclusions permitted by the state. This year’s version, released two weeks ago with the budget proposed by Gov. Mike DeWine, counts 134 tax breaks — exceeding $9 billion a year and approaching $10 billion annually by the end of the biennium. That’s nearly one-third the amount of the entire general fund budget for the next fiscal year.
So this is serious money. Unfortunately, state lawmakers have engaged in a cursory review of what is essentially state spending, taxpayer dollars routed to designated line items. They did form a review committee, but in its first effort last year, the members largely went through the motions, recommending no changes to the 15 tax breaks on the agenda.
That was disappointing not just because of the huge sum on the table. Some of these tax breaks date to the 1930s and 1940s, an assessment long overdue about whether they serve a valid public purpose.
For certain items, the evaluation is easy, say, to continue the exemptions from the sales tax for prescription drug purchases and purchases by schools and local governments. Ripe for elimination is the relatively recent tax break for business owners, the first $250,000 in income tax-free and then taxed at a lower rate of 3 percent, costing the state $1 billion a year. Don’t expect lawmakers to retreat from this tax break, though they have yet to show an overall economic benefit.
Policy Matters Ohio issued a report last week identifying a dozen tax breaks worthy of narrowing or closing entirely. For instance, the Cleveland-based think tank cites the $59-million-a-year break that retailers receive for collecting the sales tax, a task achieved electronically today. Few other states provide something similarly generous, the benefit primarily going to big retailers.
The sales tax exemption for building and construction materials initially applied to public, religious, charitable and nonprofit organizations. Then, it steadily widened. Today, it covers such things as structures for “horticultural purposes,” captive deer and fish farming. Policy Matters points out that in this part of the country, only Pennsylvania allows for something comparable, and its break is far less expansive.
How much does this tax break cost the state? Around $210 million a year. An easily gamed exemption from the commercial activity tax for drug distributors bleeds $169 million annually.
In 2003, lawmakers limited to $800 the sales tax paid on the purchases of time shares in private jets, an estimated $13.8 million a year flowing to wealthy Ohioans, who in the meantime have benefited from steep reductions in state income tax rates and the end of the estate tax.
Again, some exemptions are worthy. The concern is that the state hasn’t taken care to evaluate the many tax breaks, even as the cost is expected to climb by $620 million during the next biennium. Imagine the Statehouse taking such a lax approach toward Medicaid spending or funding for public schools. More, the legislative disinterest now coincides with a decade of disinvestment.
Consider higher education, state funding since 2008 down 20 percent in inflation-adjusted dollars. The DeWine budget boosts need-based college aid, yet it essentially keeps flat the state share of instruction, or the primary vehicle for easing high tuition and fees. Tally the high priorities, from early education and child care to Lake Erie and public transit. The thinking isn’t to throw billions at problems. A small portion of the tax expenditure revenue could make a difference if well directed. First, state lawmakers must commit to the hard task of evaluation. For now, they appear content just to spend.