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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.

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The 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.

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The 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.