Seeing red? Imagine trying to overhaul Ohio's tax system

4/6/2003

COLUMBUS - Mention the word “taxes” or spot April 15 on the calendar, and many see red, even those who believe that forking over a chunk of their hard-earned cash translates into the common good.

So as you take a break from your returns, imagine what it would be like to try to overhaul Ohio's tax system on individuals and businesses.

State Rep. Sally Conway Kilbane (R., Rocky River) is awash in a sea of red.

Over the past several months, Ms. Kilbane, chairman of the House Ways & Means Committee, has pursued one of the most elusive goals in the Statehouse - “tax reform.”

In its purest form, and Ms. Kilbane knows purity since she has a PhD in economics, tax reform is “revenue-neutral,” meaning that any changes that increase tax revenue are offset by changes that decrease it.

Last December, Gov. Bob Taft summoned reporters to the governor's mansion and used the phrase to try to soften Ohioans up for a tax increase.

A month later, he rolled out a proposal to raise $2.27 billion over the next two years to balance the state budget. Add in proposed cigarette and alcohol tax increases, and the total hit $3 billion.

“We are seeking additional tax revenue as a last resort. It is something that I am very reluctant to recommend,” Mr. Taft said.

Although the governor's proposal called for adding dozens of services to the state sales tax base and boosting taxes collected from the corporate franchise tax, Mr. Taft tried to build support through changes to the personal income tax.

Mr. Taft's plan would lower rates for all brackets, except 6.9 percent. It would replace the personal exemption and exemption credit with a flat credit per return plus an additional credit per dependent - both indexed for inflation, phased in over three years, and starting in tax year 2005.

The governor estimated that 550,000 to 600,000 low-income Ohioans would not owe any tax. But by delaying indexing of brackets for inflation until 2009 and making the income tax on trusts permanent, the governor estimated the state would raise an additional $115.4 million over two years from the personal income tax.

A day later, state Rep. Lynn Olman (R., Maumee) said a temporary increase in Ohio's sales tax rate from 5 percent to 6 percent was better than Mr. Taft's plan to start taxing everything from cable TV to tattooing.

None of this fazed Ms. Kilbane, who methodically worked on three separate committees to achieve the ultimate in tax reform: simplicity, equity, and fairness, stable and sufficient revenue, neutrality, and competitiveness.

When Ms. Kilbane rolled out her proposal last Tuesday, she proposed changes to Ohio's personal income tax - and opened a debate that is long overdue at the Statehouse.

Ohio has an income tax with nine rates, ranging from 0.743 percent for those with taxable incomes up to $50,000, to 7.5 per cent for those with incomes above $200,000.

Ms. Kilbane's plan calls for a 2.25 percent rate for those with taxable income up to $50,000, and 4.64 percent for those with income above $65,000.

Individuals with income between $50,000 and $65,000 would be taxed at a rate between 2.32 percent and 4.41 percent on a sliding scale, as income increases by $1,500.

Ms. Kilbane's plan would eliminate most credits and deductions, with the exception of the resident and nonresident credits, and various retirement income and senior credits.

State Rep. Mike Gilb (R., Findlay) agreed with the analysis of Ohio University economics professor Richard Vedder: bold for Ohio, but not bold nationally.

Mr. Gilb and other conservative Republican House members back a flat tax. Michigan has one. Indiana has one. Pennsylvania has one. Illinois has one.

Mr. Gilb's proposal calls for a rate of 3.5 percent, with a $15,000 exemption for single filers, $30,000 for married filers, and a $2,000 exemption per dependent.

“I understand the political hurdles of trying to get a flat tax in. This two-tiered system is a step in the right direction,” he said last week about Ms. Kilbane's plan.

Democrats, however, attacked the proposal as old-school Republican economics: shifting the tax burden from the wealthy to the middle class.

Mr. Gilb, who is in his second term in the House, doesn't buy it.

“By phasing it in, we're trying to minimize any detrimental impact to middle-class taxpayers. But looking at the revenue generations curves show that the middle class would see a reduction,” he said.

Other House Republicans and a Cleveland-based group, the Federation for Community Planning, disagreed.

Mr. Gilb's flat-tax proposal would lower taxes on each category of income, but 71 percent of the tax change goes to the top 20 percent, according to the Institute on Taxation and Economic Policy.

And nearly half, 47.5 percent, of the benefit would flow to Ohioans with average incomes of $117,000 and above.

“Adopting a flat-tax would make Ohio's tax structure less fair, and it will grow too slowly to adequately fund essential services like primary and secondary education, health and human services, and higher education in the future ...” said David Ellis, a fellow with the Federation for Community Planning.

Mr. Gilb, however, agrees with anti-tax activist Scott Pullins, who said a flat tax would help reverse the deterioration of per capita income in Ohio and make the state a more attractive place to invest.