During the past few months, One Ohio Now traveled the state to discuss the Ohio budget with parents, workers, and local and state leaders. Many Ohioans expressed a strong appreciation for great public services that lead to stronger communities. State Government is a place where we can come together to accomplish things like public safety, school systems, and building reliable systems of infrastructure for everyone to use.
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We all value public safety, decent schools, and a good quality of life for our family and friends. Yet, too often, we operate under the idea that our state and communities can’t afford all of these things, and we must sacrifice something as a community. This sacrificial mindset moves us to accept cuts to vital community programs that enhance our lives, and to never think about what our communities really need.
One Ohio Now’s State Director, Gavin DeVore Leonard, testified on May 1st in the Ohio House of Representatives Committee on Ways & Means. The committee has asked for ideas and proposals that, “promote a stronger Ohio economy that would contribute to tax policy principles of simplicity, fairness, broad bases, as well as ease of compliance and administration.” This was the first of what may be many hearings to address how our state funds great public services that lead to stronger communities.
During his testimony, Gavin suggested to the committee that, “we have enough resources and enough wealth in Ohio to meet the needs of the people who live here and who want to have a great quality of life. We can afford world-class schools, well-maintained roads, verdant parks, responsive emergency services, and more. But the box we’ve built – the size and scope of the state budget itself, but more importantly our mental construct about what resources we have – is holding us back. We’ve bought into the idea that there isn’t enough money to fund things fully, and for the most part we don’t even try.”
As this conversation continues, all Ohioans need to think about what we value as a state. Do we like having fire and police departments, schools, well-maintained roads, and social service programs to help those who have fallen on difficult times? Its not about expanding or limiting government, instead it is about making sure that all families have access to a great library, all kids have access to a good school, and all of us have access to safe communities. Instead of measuring tax reform on whether it cuts overall taxes or raises them, lets measure any tax reform proposal on if its fair, just, and meets the needs of great public services that lead to stronger communities.
BELIEF: A sales tax is better than an income tax
RATING: Very Misleading
The Governor proposed shifting the tax burden in Ohio from the income tax to the sales tax. Ohio has a slightly less regressive tax structure than most states right now, because our income tax produces 44% of our state general revenues. Many anti-tax organizations and individuals, in an effort to shrink government, are now claiming that income taxes are too ‘volatile’ during an economic recession. The truth is that all taxes are vulnerable to economic downturns and changes in the economy. Ohio can address economic volatility by increasing our rainy day fund maximum and proper planning. Cutting a revenue source will not help guard against economic downturns.
We need to protect a strong income tax in Ohio because it is the only tax levied based on a person’s ability pay. Sales and property taxes are levied on all residents regardless of income. In Ohio, the poorest 20% of people pay about 5% more of their income towards state and local taxes than the top 1% do. The income tax helps to balance out the inequities within state and local taxation. Without the income tax, the difference could potentially double.
It is true that revenue from an income tax may decrease during a recession, but so do all taxes. Depending on the type of economic downturn revenue from property or sales taxes may fall faster and farther than income tax revenues. Research shows that state sales tax revenues fall during an economic downturn but are less responsive when the economy starts to emerge from the recession. Revenues from an income tax will grow quicker during a recovery because of the graduated nature of the income tax. Public investments into infrastructure, education, and public safety can be vital in creating a strong economic recovery. Cutting income taxes now denies Ohio the opportunity to collect revenues that can restore delayed projects, enhance our public investments, and shore up budgets for the future.
We cannot be overly reliant on one source of revenue, either. Ohio’s schools are a prime example of what happens when you are over-reliant on one source of funding. During the last recession, Ohio property values fell dramatically, and the local tax collections fell too. This was particularly hard on our public schools that are over-reliant on property taxes. Local districts did receive some federal support to meet their budgets during the recession. However, the state was unable to help, primarily due to the 2005 income-tax cut that was still being phased in. Ohio now has additional revenue at the state level because of the quick rebound in the income tax collections, but local communities and schools that rely on sales and property taxes continue to struggle. With the cuts to revenue sharing, the economic recovery is not felt by local governments and schools.
All tax revenues are volatile during a recession, like the one we just experienced. Replacing an income-tax with a sales tax will only decrease revenue and not volatility. We cannot allow anti-tax organizations to latch into a new argument for dismantling the Ohio income tax. We need a strong and progressive income tax, a state sales tax, and local property taxes to have a balanced approach to generating revenues for great public services that lead to stronger communities. The Ohio House of Representatives will begin looking at long-term tax reform in early May 2013, and they need to understand that volatility is not a substantial argument for cutting the Ohio income tax.
A competition for the lowest income-tax rate is the wrong competition for Ohio, instead we should compete for the best quality of life, best schools, and greatest state in which to live and invest.
Tax cuts do not make a state more competitive, but cost state valuable investments in infrastructure, education, and a better quality of life for residents. The theory is fairly simple, but the facts don’t measure up. Many claim that if a state cuts its taxes, more people and businesses will move to that state for the lower rates. However, people do not move because of a lower tax climate, people move for jobs, education, adventure, and family.
The theory has been tested and the results show us that state tax policy has little to no impact on decisions about where people decide to live, go to school, or set up a business. In 2005, Ohio passed a 21% income tax cut, and since that time Ohio has lost residents and over 200,000 jobs. People like to live near family and friends. Businesses set up near their consumers, where the owner lives, and near other similar businesses businesses.
Comprehensive research on Ohio migration between 1988 and 2008 shows there is no significant relationship between income taxes and interstate migration. The research finds that interstate migration is based mostly on job opportunities and not on a minor reduction in income tax. The state income tax is a fairly minor expense for most people. Most Ohioans currently spend less than 3cents on the dollar for their state income tax, and this amount is deductible on your federal taxes. Most states are within a penny or two of Ohio as well. When comparing costs, income tax rates are fairly minor throughout the country, and often-lower income tax rates mean fewer services or more taxes somewhere else.
Businesses will likely start where the owner lives, not move a continent away for a tax savings. Research has shown that graduates of M.I.T are likely to start businesses in Massachusetts, even though Massachusetts is a high income tax state, because the recent grads know the community and have networks. Businesses also tend to cluster. Many Internet companies have settled in the Silicon Valley, because they want to be near others in technology, even though California is a high tax state. Business owners also want to live where there is a high quality of life for an affordable amount. Our low cost of living and great public parks are a better investment than more tax cuts.
Cutting Ohio’s income tax rate by 7% (as proposed by the Ohio House) or 20% (as proposed by the Governor) will not make Ohio more competitive. We can be more competitive by guaranteeing a great quality of life through our highly accredited state parks, outstanding institutions of higher education, and safe communities. These are investments that will encourage new families and entrepreneurs to pick Ohio over other states.
The Ohio House of Representatives passed its version of the state budget late last night 61-35 – one Republican, Rep. Hood, voted against the budget and 3 Democrats, Reps. Barnes, Milkovich, and Patmon, voted for the budget.
After hours of unexplained recess Thursday afternoon, the biggest news of the day was the inclusion of an amendment offered by Republican Rep. Sears related to Medicaid expansion. The short explanation: the amendment means that Medicaid expansion language is in the budget, which will lead to it being discussed in the Senate.
Other changes in the final days included the removal of a provision limiting the teaching of sexual education that had drawn wide criticism, an academic stress commission that undermines the authority of local schools and districts, and a misguided change requiring that colleges and universities not provide out-of-state tuition paying students with utility bills to verify Ohio voter registration (if they do, they can’t charge out-of-state tuition). For the most part, the bill (HB59) passed including the pieces expected following the sub bill introduced last week.
Now the budget moves on to the Senate, where it will be debated and discussed for the next several weeks (it is expected to be voted out the first week of June). Medicaid expansion remains a – arguably the – hot topic, education funding changes are bringing loud jeers as the House took away $200 million from the Governor’s proposal (which was already far insufficient), and income tax cuts and the “big business” income tax cut continue to be contentious.
We’ll keep you posted as the budget makes its way through the process.
Ohio’s Governor and others claim that our income tax is too high. However, we are unsure as to why this is the belief. The income tax in Ohio is the only tax levied based on a person’s ability to pay for great public services like schools, public safety, parks, and our libraries. For the value we all receive, Ohioans receive a great return on our income tax investment.
As we compare our tax rate to other states, we actually find that we are not that high. In fact, Ohio’s tax amount is fairly average. However, our goal should not be a race to the bottom. Asking if our tax rate is high or low is not the question we need to ask. Instead, Ohio should ask what types of great public services we want and build our tax system to finance these services adequately.
The Governor and others don’t paint an accurate picture when they discuss our income tax by only discussing the top tax rate of 5.9%. This rate applies only on incomes over $204,000—which very few Ohioans pay. Most Ohioans pay a rate closer to 3%, because of our graduated income tax structure. Ohio has 9 different income tax brackets. The first $5,200 everyone earns in Ohio is taxed at only .587%, then income from $5,201-$10,200 is taxed at only 1.17% and so forth up to the $204,000 level at 5.9%.
It is difficult for a direct comparison of states from all vantage points, because different tax rates kick in at different dollar levels in different states. For example Oklahoma has a lower top tax rate than Ohio at 5.5%, but this rate kicks in at $15,000. While we have a higher top rate, our average rate is much lower. While different states have their top tax bracket kick in at income different levels, 28 states have a higher top tax rate than Ohio.
Compared to other states, Ohio’s income tax is average. Seven states have a flat tax, where everyone pays the same percentage on all of their income. While this may lessen the tax bill substantially on the wealthiest residents, it raises the tax rate for low and middle-income residents. Over 70% of Ohioans pay less than 3.4% compared to Michigan 4.33%, Illinois 5.0%, Colorado 4.63% and Pennsylvania 3.7% where all residents pay a higher rate on all of their income. It is misleading to discuss only the top tax rate in Ohio of 5.9% because most Ohioans come nowhere near this rate.
We need to ask why organizations and individuals are so set on cutting and eliminating income taxes. Moderate and even high state income taxes do not harm business. Of the nine states without an income tax, there has been no common trend of economic improvement. In fact, some states without an income tax like Nevada, have continued to perform very poorly and lack the resources to invest in great public services. Some states with much higher income taxes continue to grow and out perform others economically. Cutting the Ohio income tax will not help the economy and will hurt our communities. The income tax is the only tax based on a person’s ability to pay, and therefore should be designed to generate the needed revenues for great public services that will lead to a stronger Ohio.
Ohio’s state budget bill, HB59, is making its way through the process – we’re now nearly 1/3rd complete as the budget is slated to be voted out of the House of Representatives on Thursday, April 18th. Next, the budget will move to the Senate. For a look at the whole process, click here. Here are the toplines based on where we’re at now:
- Yesterday, an estimated 2,500 people were on the Statehouse lawn rallying for Medicaid expansion. This component of the budget bill would provide health care for 275,000 Ohioans, bring 30,000 jobs to our state, raise over $1 billion in revenue over the next 10 years, and more. It is supported by a wide range of advocacy groups – many of whom typically butt heads: Planned Parenthood and Ohio Right to Life, for example. It is the breadth and depth of the coalition that supports Medicaid expansion that makes it so frustrating that the House pulled the expansion from the proposed bill that was introduced by the Governor. This is the biggest change to the bill and the piece getting the most coverage.
- Income tax cuts, something that One Ohio Now has pushed back on from the beginning because of how they disproportionately benefit the wealthy, are another significant change in the sub (short for substitute) bill introduced in the House on Tuesday. The original proposal called for 20% across the board income tax cuts (plus an additional one time 4% cut via the spillover effect from the Rainy Day Fund), but the new proposal calls for 7% cuts. In addition to lowering the income tax cuts – a great move for Ohio (though we should go further and eliminate them altogether since they have not been proven to work) – the “big business income tax cut” of 50% was taken out. This was another great decision, given its misguided nature and large benefit to the wealthiest 5% (who would get 80% of the benefit), while the average true small business wouldn’t get enough in return to hire a single employee.
- Continuing the trend, the most notable pieces of the new budget bill are those that don’t exist. Governor Kasich’s proposals to expand the sales tax base and reduce the rate: out. His reasonable move to increase the severance tax on oil and gas drilling: no longer in the budget. These tax changes were the revenue generators that were being traded for income tax cuts, so with them gone the House could not find the money to give away to the wealthiest Ohioans. In fact, the House is still planning to use one-time money, which will leave a structural imbalance over time, to pay for part of the income tax cuts – using Rainy Day Funds. Even Senator Keith Faber has acknowledged that a 7% income tax cut is unlikely to produce any results given what has happened in the recent past.
- The K-12 education funding formula has been changed substantially and the net result is that the total amount of funding is down $313 million from the Kasich proposal to the House proposal. There are numerous other changes, but what is important to remember is that K-12 education saw $1.8 billion in cuts in the current budget – the investment needed in our education system is not in this budget. We have ongoing concern that poor districts will not get nearly what they need while the wealthy continue to get wealthier. This is an unconscionable trend, and education advocates are working hard right now to get things moving in the right direction.
- Yet again, the legislature has put in language to defund Planned Parenthood. This political attack would lead to reduced health care opportunities for low-income women across the state and is being vociferously debated in the House as I type.
There are certainly a number of other changes to the House version of the budget – an attempt to mollify health and human service leaders on Medicaid expansion by giving $100 million (a substantial sum in nearly any other context) to mental health and addiction services, taking out the “parent trigger” language from the K-12 component, removing the workload requirement changes to the higher ed budget, and more. And at over 4,000 pages, there is new information still being found every hour.
Hopefully you’ve found this to be a good summary – let us know if you have specific questions or would like to learn more. And don’t forget to weigh in yourself by contacting your legislators!
BELIEF: Income Tax Cuts help Small BusinessThis myth continues to circulate despite a large amount of research from the Small Business Administration, Center of Budget and Policy Priorities, and even the conservative CATO institute. Academic literature and history point out that there is no link between state income tax cuts and small business job growth.
Most small businesses pay little to no money in state income taxes. 87% of all small businesses have annual profits of less than $50,000, and 40% of all small businesses operate at a loss each year. Ohio’s income tax is assessed based on profits (gross receipts minus expenses), therefore companies with little to no profits pay little to no state income tax. Even rapidly growing companies often pay nothing in state income tax, because they are investing all income immediately back into the business and not taking profits that would be subject to the tax.
In the United States less than 14% of all tax filers are active small business owners and less than 3% have any employees. Many small businesses in Ohio are accountants, lawyers, and independent contractors who will not be expanding regardless of profits. These are individuals who have no plans to hire others or invest in meaningful ways, regardless of tax cuts.
Finally, the idea that tax cuts will encourage a business to expand and grow is not realistic based on our current economy. Business expands when the market demands it, and not because an owner has a few dollars extra in their bank account. Businesses will finance risks and expansion through loans and not just from cash resources. A 7% income tax cut (the current Ohio House budget proposal) will cost Ohio billions of dollars in the long-term, and it will provide only a few dollars to individual businesses. This money could be invested in small business loan programs, training, investments in technology, better schools, and improved infrastructure that will be much more effective and efficient at serving the needs of small businesses.
During my first year in Seminary, I read an article by a Christian organization from the late 1980s that said Jesus favors low taxes. I was very confused about this at the time, because I am not sure where in scripture this argument came from. I now realize that political ideology had misled this religious organization’s values. During this Holy time of Passover and Easter for members of the Jewish and Christian traditions, I challenge all of us to ask ‘what does a moral budget look like?’
I do not believe God has a specific tax plan that we are to follow and figure out. There is no ‘perfect tax system’. Tax policy is the means to achieve a goal. Many religious traditions echo a sentiment that the community, through government and other institutions, should do justice and love mercy. Justice should be the goal of the community, and our state budget and fiscal policy is the answer to how we achieve justice. The Ohio budget is a moral document, and we should look to see whether or not the needs of the sick, the hungry, and the vulnerable are met.
Governor Kasich has done well on some of these standards but not on others in his budget proposal. Medicaid Expansion, for example, is a step towards justice by caring for the sick and vulnerable. In addition, it will create many new jobs and allow others an opportunity to lift themselves out of poverty.
However, an income tax cut in this budget does not achieve our moral goals. We continue to grossly underfund the education of children—leaving the most vulnerable children in difficult situations. School psychologists, nurses, and counselors are often the first line of rescue for children, but with continued budget cuts these positions are becoming a rare blessing for districts with resources. Adult protective services continue to be underfunded, as well, leaving the elderly to suffer neglect and abuse. There are many places in this budget where a restoration of past investments would be dramatic at helping those in need and building up our communities.
Both Passover and Easter are times of hope for people of faith. A moral budget will invest in great services that will improve the quality of life for us all, provide resources to those in need, and dignity to those who are suffering. Ohio can adopt a moral budget that places a priority on those most in need, but it is up to all Ohioans to make this a priority.
Each Fiscal Focus will look at our vision for key areas of public investment in Ohio and provide insight into current budgetary trends for that sector. All Ohioans are impacted by our elected officials’ budget decisions. In 2013, a new two-year state budget will be crafted – this series will provide a comprehensive overview of the major questions and concerns for Ohio’s 2014-15 biennial budget.
Why the Public Should Invest
Higher education is critical for Ohio in developing the skills of tomorrow, inspiring new innovation, and developing an insightful and compassionate society. In addition to providing degrees and certifications, Ohio’s colleges foster diversity of thought. Through our colleges and universities, Ohio becomes an attractive place to learn, invest, and raise a family, because great public services lead to stronger communities.
The Current Reality
Ohio has an outstanding system of public colleges and universities. There are 13 public institutions that have four-year degree programs and 23 community and technical colleges. The state of Ohio administers its support for these programs through the Ohio board of Regents. Between fiscal year 2011 and FY 2012, the Ohio Board of Regents had a cut of over 9% for a total budget of $2.3 billion in 2012 and $2.4 billion in 2013.
Tuition increases have been a common trend for Ohio students. For example, The Ohio State University has increased tuition 7% over the past 2 years for an average tuition of $10,216 per academic year for in-state students. University of Miami tuition is $13,067 and Bowling Green is $10,393. Ohio’s community colleges saw an increase of 12% between the school year starting in 2008 and 2011.
To meet these rising costs, students are more reliant on state and federal aid programs. Prior to 2009, Ohio ranked 18th for the availability of need based college aid, but as a result to cuts in state assistance programs Ohio now ranks 35th. Neighboring states all rank better than Ohio. The state of Ohio has offered the Ohio College Opportunities Grant (OCOG) as a primary source of need based aid. OCOG was created in 2006 to replace previous grant programs for low and moderate-income students. In FY2008-09 the state provided $352 million for OCOG. After years of cuts, OCOG is currently funded at $160 million for FY 2012-13.
In 2011, the state adopted, the “Pell First” policy, which required OCOG funds to be given out only after Pell Grant distributions. The OCOG funds are distributed based on the unmet need of tuition for low-income students, and since the Pell Grant covers the cost of community college tuition, it eliminates these students from eligibility. However this eliminates need-based aid for living expenses, materials and other costs that college students incur. Adults, low-income individuals, and non-traditional students rely on the low cost, flexible schedules, and the accessibility of Ohio’s community colleges for their education. Research has recently shown that student debt from 2-year colleges has risen in Ohio as a result of this policy change.
The 2014-15 Budget
Governor Kasich introduced changes to the structure of higher education funding in November of 2012 after months of conversations with university presidents. These proposals are incorporated into his budget proposal released on Monday Feb. 4th. These changes will be vetted and considered over the next few months as part of the budget process.
The changes focus on how the state will distribute funds to local colleges and universities. In the new formula there will be a focus on course enrollment and graduation compared to student enrollment at the institution. There will also be a formula that will regulate tuition increases based on state averages. While we will need the full budget and time to analyze many programs, OGOG at the same basic funding levels from the 2012-13 budget to the 14-15 budget.
In addition to the static funding level of OCOG, the proposed budget, does not remove the Pell Grant priority rule. With Pell Grants falling an average of $3,000-$5,400 short in financial need, college affordability will likely be a point of conversation in this upcoming budget debate. Many advocates hope to remove the Pell Grant Priority rule and increase OCOG funding. By making college more affordable, it will reduce debt on students leaving college and entering the workforce.
The overall funding levels for the Board of Regents remains static for higher education with a 0% increase in 2014 and a slight 2% increase in 2015. New investments by the state would have the potential to expand opportunities for students, reduce tuition and fees, and continue to provide an excellent system of public higher education that will provide diverse offerings for all Ohioans.
Speak Up!
If you would like to get involved as the state budget nears and our advocacy increases, please follow us on Facebook, Twitter, or sign up for our emails. Please read our past Fiscal Focus articles on K-12 education, state parks, mental health, senior services, or privatization.
If you’re interested in additional information on higher education in the state budget or have any other related question, please contact us.
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