Kasich’s tax plan rewards rich, starves public services

3/3/2013

GOV. John Kasich proposes a major revamp of Ohio’s tax system, cutting income taxes and broadening the sales tax. His plan would transfer wealth from our state’s poor and middle class to those who are well off.

It would tilt the state and local tax systems in favor of Ohio’s wealthiest residents. And it would drain nearly $1 billion in tax revenue over the next two years — money that is badly needed by schools and local governments whose support was slashed in the current state budget.

The Institute on Taxation and Economic Policy, a nonprofit research group in Washington, calculated how Ohioans in different income groups would fare under Mr. Kasich’s plan. It concluded that he would give the most affluent 1 percent of Ohioans — those who made at least $335,000 in 2012 — an average annual tax cut of more than $10,000.

Households in the middle fifth of the income spectrum, which earned between $33,000 and $51,000 in 2012, would come out about even, with an average annual tax increase of $8. The bottom fifth of taxpayers, making less than $18,000 a year, would see an average tax hike of $63.

Why do things work out this way? Ohio has a graduated income tax; its rates go up along with income. So an across-the-board cut goes mostly to those near the top of the income scale.

Governor Kasich’s proposed tax cut on income from certain businesses has even more concentrated benefits. More than half of the reduction would go to Ohio’s top 1 percent.

Although the governor calls his proposal a “small business” tax cut, it also would give reductions to owners of large businesses and create a new loophole to avoid taxes. It is unlikely to generate many new jobs.

Mr. Kasich also wants to broaden the state sales tax to cover most services, while cutting the state sales tax rate from 5.5 percent to 5.0 percent. Broadening the sales tax base, if it is done carefully, is helpful because our economy has shifted to services, many of which are not taxed.

But the governor’s proposal would disproportionately affect low and middle-income Ohioans. Any broadening of the sales tax base should be accompanied by steps to reduce or eliminate this tax increase for those who are least able to afford it.

One step would be to provide a refundable state earned income tax credit, as more than 20 states already do. Such a credit for working families could be pegged to the federal earned income tax credit, which more than 900,000 Ohioans receive each year.

The General Assembly also should consider adding sales tax credits that would provide a flat amount for each member of a family below a prescribed income threshold. Finally, lawmakers need to give careful consideration to the services that would be taxed.

Governor Kasich wants the revenue from a broadened sales tax to help pay for his income tax cut, but he doesn’t want counties and transit agencies to benefit much. His plan offers them modest gains, but includes a complicated mechanism that would require three downward adjustments of local sales taxes, which piggyback off the state sales tax.

Worse, the governor would prohibit local sales tax increases for three years, whatever the financial condition of counties and transit agencies. This policy would prohibit local voters from making their own decisions about how to govern their communities.

Contrary to common assertions, Ohio’s overall taxes are about average among states. In any event, recent studies show there isn’t much of a connection between state tax levels or income-tax rates and economic success.

Mr. Kasich’s plan also includes a needed increase in the severance tax paid by oil and gas companies. But it still would be less than the tax levels of other states.

As they evaluate the governor’s plan, lawmakers should separate the wheat from the chaff. They must ensure that Ohio has a fair and adequate tax system — unlike the current proposal, which would reward the affluent while reducing the state’s ability to invest in public services.

Zach Schiller is research director of Policy Matters Ohio, a Cleveland-based not-for-profit research organization that examines the effect of economic issues on working families.