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Tax Rankings: an unhelpful measure

Don't be tricked by tax climate rankings

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.

The Economics of a Bridge

roadHow many of you took an economics class in high school or college? Economics traditionally focuses on reducing costs and increasings sales, in order to increase profits. But how does the calculation change when profit is no longer the driving force?

In the “Economic Case for Free Bridges and Roads” Alex Marshall presents the public economics piece that is often forgotten in our public finance discourse. Private companies seek to maximize profit, but public investments should maximize usage – that way the public get the most return on their investment.

Usage is our Return on Investment. We need to focus our economic return on the usage and not the profitability of a bridge, a school, or other public investment. The value of a bridge comes from its benefit to the community. The cost of a bridge will be the same whether 50 people or 50,000 people use it each day. The return on investment is greater if 50,000 people use the bridge. Fees required to cross the bridge will reduce the usage – and lessen the return on investment. I would also add that not only the quantity of the usage, but the quality of the use. For example, a bridge to connect a hospital to a neighborhood (saving valuable minutes in an emergency) has a high quality, even if use is limited.

Capacity Marshall points out that capacity issues (such as on busses and subways) can warrant fees-for-service, but only to address capacity issues and not in an attempt to cover the full cost of these services. The fees will drive down usage, reducing the public good done by that service.

The common complaint from taxpayers is ‘I don’t ride the bus, why should I pay for it?’ There are a few good reasons. First, public transportation reduces traffic congestion, pollution, and parking hassles for others – so everyone does benefit. If we believe public transit serves the public good, everyone should pay their fair share to cover the costs. Second, about 50% of highway spending in America comes from general revenue sources – and not the gas tax or user fees (tolls). People that don’t drive pay for roads that others use. Public investments improve the community – not just a select few.

Ohioans Love Libraries. Many Ohioans never set foot in a library, but still appreciate the asset to the community. If there were check-out fees, the usage of our public libraries would dramatically drop. We don’t want this to happen, because libraries serve a public interest. We invest in the public libraries and keep the service free to benefit everyone. (late fees address are used to deter people pushing the capacity of the library by not returning materials on time. Nobody would want late fees to be a primary funding source for our libraries!) We want more people using them, to maximize our return on the investment. Our roads, schools, public transportation, and social services are needed just like our libraries and we should finance them as such.

 

Elimination…

decisionThe Cleveland Plain Dealer ran opposing Opinion-editorial pieces questioning if Ohio should eliminate the income tax. Charlie Earl of the Ohio Libertarian Party wrote a piece calling for Ohio to dump the income tax and Zach Schiller of Policy Matters Ohio wrote a piece identifying how dumping the income tax would hurt Ohio. (Policy Matters Ohio is a coalition member of One Ohio Now.)

Mr. Earl correctly identifies the impact of cutting the income tax in Ohio – cutting services. Mr. Earl says, “As a rule, states that get by without a personal income tax just spend less per resident than states that don’t.” This means less for education, higher college tuition, more potholes in the streets, and fewer community services that strengthen our communities. Most elected officials who oppose the income tax refuse to acknowledge that income tax cuts will lead to service cuts. They continue to believe in a misguided theory that lower taxes produce more revenue for the state. Eliminate the income tax, eliminate many great public services that strengthen our communities. 

Mr. Earl also spouts a favorite talking point of anti-tax organizations. He believes that tax cuts attract business and people into Ohio. This just isn’t true. Research continues to show that people move for weather, jobs, and family. When you look at the mobility between all 50 states, people are moving to the energy boom or warmer climates – disregarding the income tax rates of those communities.

It is time for Ohioans to get real on tax cuts. They simply don’t work. As Mr. Schiller points out, Ohio has lost jobs over the past decade of income tax cuts. Eliminating the income tax will shift the tax load onto property and sales taxes – raising taxes on low and middle income Ohioans. Struggling businesses with low profits will have a higher tax load while highly profitable business owners will see their taxes cut… again.

Candidates and Taxes

keep calmThe Cleveland Plain Dealer asked candidates in Northeast Ohio their opinions on the tax change packages of 2013 and 2014. (READ THEIR ANSWERS HERE).  This is a very important question, because more income tax cuts will likely be one of the largest budget proposals next year – and those elected will need to make a decision.

Ohio’s income tax generates about $8 billion a year for public services and our communities. In 2013-14, the state cut income tax rates by 10%, cut taxes for pass through entities by 75% (first 50% but expanded to 75%), and raised the sales tax rate by about 5%.

WHAT THEY SAID:

Many candidates discussed the ongoing tax shift from the wealthy to the poor by raising the sales tax and cutting the income tax. Other candidates discussed the shift from the state level of funding to the local level of funding and onto property taxes. Other candidates focused their comments on supporting the tax shift and income tax cuts as a smart business and economic decision. For the most part, these answers did not discuss the lost services. Also, no candidate discussed research that points to the harm that business tax cuts may have on the economy. Or to research that shows how an income tax can reduce growing volatility in our tax code that results from growing inequality.:

Public Investments: Not one candidate for Governor and very few state legislative candidates connected taxes paid to the services they fund. When we cut any type of tax, Ohio policymakers must a) make up that revenue somewhere else, b) cut funding for services or c) a combination of the two. Since 2005, Ohio has cut taxes for the wealthiest Ohioans, raised taxes on low and middle income Ohioans, shifted the revenue responsibility to local communities, and cut spending in various areas.

Ohio’s elected leaders cannot make tax decisions in a vacuum. Ohio continues to under-invest in K-12 education, human services, higher education, and local communities. We need to restore funding cuts made over the past 10 years and stop cutting the income tax.

Eroding the foundation

erroding roadOhio has cut our state income tax 7 times in 10 years. The foundation of a strong economy continues to be reliable infrastructure, an educated workforce, and safe communities. Tax cuts erode our public investments in things like roads, schools, and public safety services. On Monday October 20th, legislation was introduced (HB 639) that will eliminate Ohio’s income tax over the next 10 years.  Elimination of Ohio’s income tax will cost Ohioans over $8 billion a year in public investments.

Since the 2005 tax cuts, Ohio has lost jobs and reduced spending on education, community services, and public safety in our local communities. Tax cuts simply have not worked.  Before any further tax cuts in Ohio – let alone eliminating the revenue entirely – Ohio should decide what kind of state we want.  Ohio could strengthen the foundation of our communities and economy by reducing college tuition, expanding pre-school access, and making our communities safer. Common sense public investments, like these and others, will strengthen our communities and improve the quality of life for all Ohioans.

 

Did you see the numbers?

numbersOhio’s poverty rate is down to 16.0% for 2013 from 16.3% in 2012. Ohio gained 200 new jobs last month and unemployment stayed the same. More Ohioans have insurance than before, but many Ohioans are still going hungry…and on and on and on.

All the numbers can become mind-numbing and lost in translation. Here is the big thing we take away from all the numbers that have recently been released – people are still struggling to get by. College debt, school fees, childcare, car repairs, and much more are making it more and more difficult for more Ohioans to get by day-in and day-out. Is this level of struggle for many Ohioans the New Normal? We can’t accept a 16% poverty rate to be celebrated.

10 years ago we cut taxes, and Ohioans were told that this would help our state create jobs and then more people would have opportunities. The wealthiest 1% of Ohioans are paying nearly $20,000 less than they would have, and the majority of us are actually paying more in taxes to maintain our roads, schools, parks, and basic public services. Tax cuts simply didn’t work. Poverty is up, jobs are down, and people are struggling.

If Ohio begins to invest wisely into efficient and effective services, we can make a difference. Ohioans would feel the investments in higher educaiton, preschool, and parks and recreation very quickly for those directly impacted by those services. Those improvements will spread throughout the entire economy as families are more economically stable and people have the opportunities for success.

Inequality slows state revenues – income tax part of solution

money scalesThe Standard & Poor’s (S&P) released a report on Sept. 15th highlighting the impact of economic inequality on state revenue. Their findings conclude that state revenue growth has declined in recent years as a result of this inequality. Most notably, states that are more reliant on sales tax see a larger impact from inequality on state revenues, while states with a progressive income tax are able to partially offset the impact of inequality on their state revenues.

The research analyzes data from 1950-2012 and concludes that slower state revenue growth is a structural problem connected to economic inequality and not a result of normal economic cycles. From 1950-1979, states averaged growth of 9.97% and since 2009 states average growth of 4.36%. State income tax cuts have not produced the promised economic growth over the past decade.

This report along with many others should lead Ohio’s leaders to re-think our 10 year trend of cutting Ohio’s personal income tax. A balance of revenue sources is needed for states, like Ohio, to maintain responsible fiscal policy and address slumping and volatility in revenues. An income tax cannot solve inequality on its own, but through smart public investments in schools and community services, Ohio can create the opportunities for all Ohioans to succeed.

Cuts add up to big impact on local communities

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State decisions impact our local communities. As a result of state budget cuts, many communities have cut hours at rec. centers, reduced police and fire department staff, and cut services for those most in need. The Cincinnati Enquirer (Gannet News) compiled the numbers to compare local government revenues. As a result of state decisions, local governments and schools have lost nearly $2 billion since 2011.

 

What did the state do? 

      • - 50% cut to the Local Government Fund
      • - Cut TPP reimbursements. (The Tangible Personal Property (TPP) tax allowed local property taxes to be levied on equipment and machinery. In 2005 the state eliminated that local tax, but guaranteed to help local governments transition their tax base). These reimbursements were cut in 2011.
      • - Elimination of the estate tax in 2013
      • - Phase out of the utilities tax (started in 2007).
      • - Eliminated a 12.5% property tax rollback on future levies.

“The Cuts Were Small – you can handle them.” – Governor Kasich. Local communities lost nearly $2 billion. This is a substantial amount of money spent primarily on income tax cuts for the wealthy that do little to benefit the rest of the state.

While the Local Government Fund doesn’t finance the majority of a city’s operations (the cut  amounted to a 3-5% loss for local communities), it accounted for revenue to invest where the local community needed it. These funds were used to keep rec. centers open, provide services to at-risk teens, or financed activities to senior citizens. A 3-5% cut dramatically reduces or eliminates these programs. 3-5% cuts matter.

Likewise, the elimination of the estate tax was not, by itself, a devastating blow to local communities, (we can’t count on wealthy individuals dying for annual budget solvency), but many communities used this revenue to replace aging equipment (like fire trucks), or restore the neighborhood park and playground. Without these funds, those fire trucks aren’t replaced and playgrounds and ball fields aren’t updated.

Small cuts to communities lead to big impact for community services.  Yes, as a result of a growing economy, increased income and sales tax revenues have helped many communities.  Many Local communities weathered state cuts by making their own cuts and raising taxes at the local level. Forgone maintenance, suspended cost-of-living adjustments, reduced hours of operation, and under-staffed offices are the new normal. These cuts continue to ripple throughout our state.

New investment is needed. Nearly 1 out of 4 of Ohio’s kids are in poverty.  With many unmet needs in our communities and across Ohio, we need to find new ways to invest in Ohio’s future. Budgets are more than balance sheets and acronyms. Budgets matter to the people who are part of the community. We all benefit from great public services that strengthen our communities.

 

 

News and Notes August 28, 2014

3 points 10 yearsNews: Think Tank says Ohio tax plan favors the wealthy, WCBE News

News: Tax Shift and Shaft, Toledo Blade

Notes: We need to rethink the 2005 tax changes and evaluate what is working and what is not. Income tax cuts have not created the promised jobs or increased resources for low and middle income Ohioans. Ohio has fewer resources to invest in our communities and many Ohioans are actually paying more in taxes. It is time to get Ohio back on track.

Which Path will Missouri Choose?

images


Two roads diverged in a yellow wood,

And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth; 

The state of Missouri will have the opportunity to vote on a sales tax increase to specifically fund infrastructure. I do not know all of the in’s and out’s of Missouri budget and transportation policy, but many of the issues in Missouri and similar to those across the nation.

1. Gas Tax Revenue: 
The gas tax just hasn’t kept pace with the cost of infrastructure. Cars need less fuel, and therefore pay less tax on fuel, and this leads to less revenue to maintain those same roads and bridges. Do states need to raise gas taxes to account for more fuel efficient cars?

2. Alternative transportation:
States have invested heavily in roads designed for cars and must invest heavily into maintenance of these roads.  Should states and localities look at new investments that may impose a high upfront cost but lower maintenance costs down the road?

3. Who Pays?
Families struggling to get by pay a larger share of their income toward sales taxes than the wealthy pay. Will sales tax increases be the right way to fund infrastructure or should revenue from a higher gas tax be mixed with income tax revenues to finance these projects?

4. We need Roads
A good road is the foundation of a strong economy. We need reliable bridges in our country, states, and local communities to keep people safe and allow commerce to flow freely.

The question is, which road will Missouri take next Tuesday?

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.
                                                                                      – Robert Frost