It's probably a good thing that Ohio Gov. John R. Kasich wasn't in the audience that gathered in a northwest college town Tuesday to hear testimony delivered to a Statehouse legislative study committee by an Ohio economic researcher.
Among those who testified today, Zach Schiller, research director at Policy Matters Ohio, told committee members that taxes, with special emphasis on the personal income tax, is not the factor that determines state economic success.
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Had Gov. Kasich been there, he would have had to summon the Lord to calm himself down. The take away from Schiller's testimony upended the governor's long held and often repeated mantra that low or no income tax rates for individuals and businesses not only make a state more competitive but help grow a successful economy.
The House Tax Reform Legislative Study Committee spent part of today in Bowling Green, a small city located in Wood County, south of Toledo, that is home to Bowling Green State University..
In the last two decades a number of states have cut taxes deeply in hopes of spurring economic gains, with unimpressive results, Schiller said in prepared remarks.
Since the phase-in of Ohio tax cuts that began in 2005, the Buckeye State has lost a greater share of jobs than all but three other states. What would have made Kasich's ears burn even more was his claim that Ohio's tax rates are not especially high.
In his second biennial budget, signed into law at the end of June, Gov. Kasich put in motion a $2.7 billion tax cut he says will drive job creation.
"High taxes are a barrier to job creation, so Gov. Kasich is committed to reducing Ohio’s overall tax burden on individuals and job creators," the governor's Web page says.
Gov. Kasich, the Ohio Republican Party and friendly Republican lawmakers have chopped tax rates across the board, which economic researchers like Schiller say will reduce taxes for the wealthiest Ohioans by more than $6,000 but will actually cost the poor and low-income Ohioans a fist full of dollars more.
As part of the tax scheme in Ohio's budget that among other changes raised the rate and broadened the reach of the sales tax, income tax rates are reduced 10 percent over the next three years. Tax relief measures changed in Kasich's first budget included $800 million in tax relief by eliminating the Death Tax and preserving an income tax cut.
In the same budget, taxable income from small businesses will be reduced by 50 percent on the first $250,000 of business income. Gov. Kasich trumpets this as a move that will free more than $1.6 billion of new capital over three years for small businesses to better leverage the expanding economic recovery and make new investments and increase.
In his testimony today, Schiller cited a 2006 study by the Federal Reserve Bank of Cleveland that sought to identify what factors had the most influence in per capita income growth. The study concluded that average tax rates are not a statistically significant factor, which was fortified by work by other researchers that found no significant correlation between overall tax levels and median wages.
"In the last two decades, a number of states have cut taxes deeply in hopes of spurring economic gains, with unimpressive results," Schiller said, according to a study performed by The Center on Budget and Policy Priorities. "That’s not surprising given that the preponderance of the peer-reviewed academic studies indicate that state and local personal income tax levels do not affect economic performance."
Looking back in time to the 1990s, when the nation of then President Bill Clinton created more than 23 million jobs, the PMO researcher said that in the years following a hike in the income tax to 7.5 percent, more than 100,000 jobs in each of the following three years were created in Ohio. Then in 2005, at the hands of then Republican Gov. Robert Taft and a GOP-led legislature, a Commercial Activities Tax was imposed and a five-year, 21 percent income tax reduction plan started. That tax cutting, Schiller said, was not followed by the same kind of growth.
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"Whether one begins with the approval date, the beginning or end of the recession, or January 2011, the results were the same," Schiller told lawmakers. "Ohio underperformed the nation. Since June 2005, we have lost a greater share of our jobs than all but three other states, Rhode Island, Nevada and Michigan."
In his campaign for governor in 2010, citizen Kasich promised to create a tax climate that allows Ohio to compete with other states to attract new businesses, foster job creation and keep existing jobs here. He claimed he wanted to eliminate Ohio's income tax, started first by Democratic Gov. John J. Gilligan, who died last week. Gilligan didn't win a second term because Republicans used the income tax issue against him, but after Gilligan lost, the winner, James Rhodes, didn't make any attempt to undo the income tax.
Schiller showed by comparing North Dakota, which has the lowest unemployment rate of any state in the nation but a personal income tax, to Nevada, which has no income tax but the highest unemployment rate, that taxes, and the personal income tax in particular, "are not the factor that determines state economic success."
Overall taxes aren’t especially high in Ohio, either, he told lawmakers. In Fiscal Year 2011 Ohio's per capita state and local taxes ranked 26th among states. At $3,910, they were slightly below the U.S. average of $4,296, Schiller said, adding that as a share of personal income, state and local taxes in Ohio ranked 17th, which at 10.6 percent were the same level as the national average. He said most states are clustered around the same relative level of taxation.
Since enacting the 2005 tax cuts, Schiller said Ohio has not seen relative job gains. In fact, according to an economic forecast made by Kasich's own budget director, he said "Ohio’s economy will grow less than the nation as a whole does during the two-year budget, our income gains will trail those of the country, and so will the number of jobs. This does not support a policy of tax cuts."
So if taxes don't really make a difference, as Gov. Kasich says they do, what does? Higher levels of education and innovation see higher rates of income growth, was Schiller's answer.
"We need a tax system that relies on those who can afford to pay, unlike today’s tax code," he said, observing that raising the sales-tax rate on goods that represent a shrinking share of what Ohioans buy is not forward-thinking tax policy.
"We need a stronger income tax so that our budget is balanced from those who can afford to pay, along with a refundable Earned Income Tax Credit. Even with the useful step of higher minimums for larger businesses, the Commercial Activity Tax is an inadequate substitute for the taxes it replaced," he concluded Tuesday.
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