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A
PLAN TO CUT THE STATE INCOME TAX AND REVITALIZE OHIO’S ECONOMY
by Robert Lawson Ph.D.
Ohio needs tax cuts. Taxes and government spending have grown significantly
in Ohio, even after population growth and inflation are taken into
account. From 1980 to 1996, state and local taxes as a percentage
of personal income rose more in Ohio than in all other states except
one. From 1983-2001, state spending grew more than twice the rate
of inflation.
Ohio has regularly received a letter grade of “D” from
the Cato Institute in Washington, D.C. for its inability to control
spending and taxation. In addition, the American Legislative Exchange
Council gave Ohio a “F” for greatly increasing state expenditures
over the past decade.
While the state has enacted temporary tax-rate reductions through
the Income Tax Reduction Fund (ITRF), only $2.67 billion of the
$4.94 billion in state surpluses since 1996 have been returned to
taxpayers in this manner. State surpluses, therefore, have become
additional pools of revenue for state spending. Because budget surpluses
represent the excess of tax revenues over appropriated spending,
they should be returned to taxpayers rather than spent by legislators.
If the money doesn’t go into government coffers in the first
place, taxpayers will be able to spend it on what they feel is appropriate.
THE BUCKEYE INSTITUTE TAX PLAN
The Buckeye Institute believes Ohio should consider enacting one
of six relatively modest tax-reform recommendations as a first step
toward a complete overhaul of the Ohio income tax system.
These proposals can be looked at as a menu of options for policy
makers to consider, as they think about what kind of tax system
Ohio should have in the coming century. These tax reforms would
have the effect of reducing the income tax burden (by between $300
million and $950 million depending on the plan) for every taxpayer
in the state.
In addition, each of the proposed reforms results in an increase
of jobs. Boston's Beacon Hill Institute developed statistical estimates
on the impact of the six tax cut proposals as it relates to job
growth, payrolls, sales tax receipts, etc. The Beacon Hill estimates
are dynamic estimates that take into account the positive effects
of tax cuts on economic activity.
Proposals 1, 2, and 3 would make across-the-board cuts in marginal
income tax rates of five percent, 10 percent, and 15 percent respectively.
These proposals cut taxes between $319 million (proposal 1) and
$954 million (proposal 3) and create between 23,000 (proposal 1)
and 70,000 new jobs (proposal 3).
Proposal 4 would increase the personal exemption from the current
$1,050 to $3,000, and is estimated to create nearly 21,000 jobs
and reduce tax receipts by $798 million.
Proposals 5 and 6 would attempt to simplify the income tax by reducing
the number of tax brackets from the present nine to four and five
brackets respectively. Both proposals would also cut overall taxes
and create new jobs.
Proposals 4, 5, and 6 would also significantly reduce the numbers
of taxpayers who would have any tax liability.
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Proposal
Description
|
Increase
in Jobs
|
Total
Tax Cut ($mil.)
|
%
of Filers Removed from Tax Rolls
|
| Proposal
1 |
cut
marginal tax rates 5%
|
23,261
|
-319
|
0
|
| Proposal
2 |
cut
marginal tax rates 10%
|
46,613
|
-637
|
0
|
| Proposal
3 |
cut
marginal tax rates 15%
|
70,036
|
-954
|
0
|
| Proposal
4 |
increase
personal exemption to $3,000
|
20,945
|
-798
|
17
|
| Proposal
5 |
decrease
number of tax brackets to 4
|
55,790
|
-644
|
25
|
| Proposal
6 |
decrease
number of tax brackets to 5
|
21,965
|
-406
|
25
|
The Buckeye
Institute report also carefully examines the case for tax cuts in
terms of efficiency, fairness, and liberty. While other normative
criteria can be and often are employed in tax debates, most discussions
about the desirability of tax changes center on these concerns.
Efficiency. Efficiency is the term economists use to describe
a world in which we all achieve maximum happiness. Of course, no
real world will ever be perfectly efficient. Taxes are one reason
why. All taxes cause inefficiencies, but some taxes are worse than
others. Income taxes are particularly inefficient because they minimize
the rate of return on the production of wealth. Income taxes stifle
the creation of wealth, giving people less incentive to produce.
The burden of taxes is therefore not just in terms of the money
we earn that is sent to the government, but also comes in the form
of lower levels of production. All of the Buckeye tax plans reduce
the tax burden and hence increase the incentive to create new valuable
goods and services.
Fairness. Equity, or fairness, is a difficult thing to consider
in terms of taxes. Do we mean by equity that similarly situated
people should pay a similar amount of tax? Do we mean the rich should
pay more? How much more? These are difficult questions without widely
agreed upon answers.
The Buckeye tax report does grapple with these complex issues. The
conclusion is that any of the proposals are certainly no less "fair"
than the current code. Proposals 1 through 3, for instance, would
grant across-the-board cuts in percentage terms. What could be more
fair than that? Proposals 4 through 6 would give lower income tax
payers a higher percentage of cuts. But all of these proposals give
larger dollar cuts to higher income people since they pay most of
the income tax. For those people who believe the rich should pay
their "fair share," we would remind them that all of these
proposals maintain a progressive rate structure.
Liberty. In terms of liberty, the Buckeye Institute unapologetically
advocates tax cuts as being more consistent with individual liberty.
Taxes, by their very nature, paternalistically substitute the judgment
of the political process for the judgment of the individual.
The Buckeye Institute wants Ohioans to be free to make their own
decisions about how their resources are used. Any tax cut, including
the ones suggested here, will increase individual liberty.
SUMMARY & RECOMMENDATIONS
In addition to the tax cut proposals outlined in this article, policy
makers should consider introducing an amendment to the Ohio Constitution
to include limits on tax and expenditure increases. The growth of
expenditures could be tied to a specific formula such as the rate
of inflation, population growth, or some combination thereof.
Another possible tax reform is to permanently index the income tax
brackets and deduction/credit levels to inflation or nominal income
growth. Not having the income tax code indexed has pushed low and
middle income Ohioans into tax brackets originally intended for
the rich.
Ohio rates near the bottom in several rankings of economic freedom
and business friendliness. If Ohio wants to become a high-tech mecca
for investment and jobs in the new century, a more favorable tax
environment for all Ohio consumers and businesses is needed.
Ohio has a strong tradition of being a bastion of growth and prosperity.
However, the state’s tax and expenditure policies of the last
three decades have put Ohio at a competitive disadvantage. Policy
makers ought to reverse this trend by taking steps to decrease the
tax burden on Ohioans. In so doing, Ohio can become a magnet for
investment and job creation.
Robert Lawson, Ph.D. is the Director of the Center for Economic
Growth and Prosperity at the Buckeye Institute for Public Policy
Solutions and the George H. Moor Professor of Economics at Capital
University in Columbus, Ohio. Much of the information contained
herein is from the recently-released Buckeye Institute Report Tax
Reform for the New Millenium. The Buckeye Institute is a public
policy think tank, headquartered in Columbus, which educates Ohio’s
policy makers, media, and citizens on market-oriented public policy
solutions. For more information, visit www.buckeyeinstitute.org
or call (614) 262-1593
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