The Ohio Department of Taxation is touting a new study by the Federation of Tax Administrators (FTA) that finds the state’s tax collections below the national median. The analysis, drawing from new statistics from the U.S. Census Bureau, finds that state tax collections were 35th highest on a per capita basis. Ohio Tax Commissioner Richard Levin has seized on this new data, excitedly proclaiming it as evidence that “Ohio is not a high-tax state.” This will surely be a staple of Gov. Strickland’s stump speech as his re-election bid heats up heading into November.
Unfortunately for those seeking to paper over Ohio’s abysmal economic climate and punitive tax structure, there are significant problems with attempting to use this new data to proclaim the Buckeye State a bastion of job creation and economic growth.
To be sure, lagging tax collections are not attributable to Ohio’s tax rates – they are indicative of Ohio’s tanking economy. Tax collections tell us little about the state’s abysmal tax structure – which is a strong indicator of its capacity to encourage sustainable economic growth – but about the health (or, in Ohio’s case, malaise) of its economy.
Over the past decade, only one state has suffered a lower rate of job growth than Ohio. The current unemployment rate is 10.9 percent, more than double the rate Gov. Strickland inherited in January of 2006. Ohio had the sixth worst GDP growth in the nation in 2008, one of twelve states to see a net decline. When the economy contracts and jobs disappear, so do tax receipts. By touting the results of this FTA study, the Strickland Administration is essentially celebrating the gradual economic decline of his first term.
This begs the question: Why is Ohio’s economy in the tank? First, tax rates are too high. Ohio currently sports nine personal income tax brackets, with a top rate of nearly 6 percent. By contrast, its neighbors – read: competitors – impose lower, flatter taxes on income. Pennsylvania has a flat income tax at 3.07 percent. Indiana levies a flat 3.4 percent income tax. Even Michigan beats Ohio by this metric, with its flat 4.35 percent income tax. Michigan, Kentucky, West Virginia, and Pennsylvania also have lower sales taxes than Ohio. These high tax rates are literally chasing job-seekers out of the state: Between 1999 and 2008 over 354,000 left for greener pastures. As a result, Strickland’s logic is turned on its head: every border state with a lower tax burden actually collects more tax dollars according to the FTA study.
Staggering growth in public employee wages and benefits constitutes much of the upward pressure on tax rates in Ohio. According to the Buckeye Institute, state workers make more than their private sector counterparts in 85 of 88 counties in the state. Ohio is also one of 28 forced unionization states – a key detriment to job growth. Between 1990 and 2009, forced unionization states experienced average job growth of 17.5 percent. By contrast, Right to Work states saw job growth of 38.5 percent over the same timeframe.
The bottom line is that the primary reason Ohio’s tax collections are low is that its economy has stagnated in recent years. Its overall tax burden remains an impediment to economic growth and job creation, especially after the 2009 Strickland income tax increase. It would be a mistake to correlate the numbers in this study with Ohio’s actual tax burden, as the U.S. Census Bureau explicitly states in the report cited by the FTA:
Analysis using total tax or per capita tax as a measure of tax burden on the citizens of a particular state can be misleading and misinterpreted.
And misleading is exactly what the tax-and-spend crowd in Columbus is doing by citing an incomplete study to advance its agenda.