The Tax Foundation released their “Small Business Tax Climate Index” (SBTCI) earlier this week, and Ohio ranked 44th – down a few spots from last year. The Tax Foundation, founded in 1937 in opposition to progressive proposals, bases their rankings on 115 features of tax law that it weights in order to generate a single number to rank states.
We shouldn’t give too much weight to this measure, because the number doesn’t paint an accurate picture for policymakers or businesses. Instead, Ohio should invest in great public services that strengthen our communities.
SBTCI is flawed:
1. Rankings are not connected to taxes paid: The rankings measure an abstract of ‘business competitiveness’ not the tax load or taxes paid by business in each state. The Council on State Taxation (COST) calculates the taxes paid by businesses in each state. As a share of gross state product, Ohio businesses pay a rate of 4.1% (in state and local taxes) compared to a national average of 4.7%. READ MORE ON THE FLAWS IN TAX RANKINGS
2. Rankings exploit minor differences: Most businesses will pay a similar total tax rate regardless of which state they operate. States, however divide up their taxes differently between business, individual, income, sales, and property taxes. Yet, the weights applied by the Tax Foundation increase the impact of an income tax on the ranking. Ranking the income tax is misleading, because 31% of all business taxes paid in Ohio (state and local) are in the form of property taxes. Corporate and personal income taxes paid by businesses are about 12%.
3. Ideology drives rankings: The Tax Foundation assumes that low and flat taxes are the best for job growth – even though much of the research disagrees. Every business is taxed differently by the state and local communities. Drawing a single ranking conclusion is not helpful for businesses or policymakers looking to develop effective, efficient, and fair tax systems. In the end, the rankings highlight a political and ideological goal of cutting taxes and reducing public services. They do not set a road map for a more prosperous Ohio that gives every Ohioan an opportunity to succeed.
A new approach:
Research also shows that state tax policy has little to do with economic growth, but smart public investments are the foundation of a strong economy.
Ohio should look at the rankings that matter most to people – safe neighborhoods, quality of our schools, a healthy environment, and other factors that impact our lives. Ohio will succeed in growing our economy by improving our schools, making neighborhoods safe, and making sure we have great public infrastructure. Instead of tax rankings, we should race to win on measures that matter to all Ohioans.