Tax rates fall, but recovery still lags

In the 10 years since the massive multi-year tax cut package that was signed into law by then Gov. Bob Taft in 2005, the state’s total non-farm employment has increased by 300 jobs, according to the U.S. Bureau of Labor Statistics.

That’s an increase of 0.0 percent, basically no increase at all.

Meanwhile, the nation’s seasonally adjusted non-farm employment during that same span has grown by almost 9 million jobs, or an increase of 6.7 percent.

Multiple factors contribute to job growth and economic prosperity, but this much is clear: the promise of increased economic growth — and jobs — has fallen short of what was forecast when the first package of income tax cuts was passed.

When Taft came to Rack Processing in Dayton on June 30, 2005, to sign the budget and put a stamp on a five-year, 21 percent cut in the personal income tax, he said it marked the end of a “Depression-era tax code.”

“The cornerstone of the budget is a tax reform plan that will grow our economy, create more good jobs and build the tax base for future public services,” Taft said of the budget, which also included a cut in the sales tax and changes in business taxes.

Similarly, proponents of the most recent tax cuts — including Gov. John Kasich — say the lower rates are unleashing an overburdened private sector to create more jobs and economic growth.

But others aren’t so sure.

“When we were passing these income tax cuts we were told that this would have a very salutary effect,” said Zach Schiller, research director for the left-leaning Policy Matters Ohio. “We were told that this would be the tonic that our economy needed. That this would be the key thing that would really goose our economic performance and our job gain.

“I say the proof is in the pudding. Show me the jobs.”

Sobering projections

At a June 26 press conference on the new budget, Kasich touted an economic comeback that “we should be able to crow about from the roof of this capitol and across this great state.”

From an $8 billion budget hole during the Strickland administration and 350,000 lost private-sector jobs, he said, “we now have a $2 billion surplus, and we have an increase in the rainy day fund.”

But as a House and Senate conference committee hammered out the final budget bill, Tim Keen, Kasich’s director of the Office of Management and Budget, presented a set of projections that show the state is trailing the nation in a number of key economic indicators. For example:

Ohio outperforms the nation only on unemployment rate, which some argue is an inadequate indicator of economic performance because of so many people who have dropped out of the labor force. Still, this year’s rate is projected to be 5.0 percent for Ohio, compared to 5.2 percent for the nation.

Schiller said Ohio is “underperforming” the rest of the country — “not just in the past, but going into the next couple of years. And we’re expected to continue underperforming the country.”

So about the tax cuts, he asked, “Where is the great benefit?”

Schiller also said Ohio’s tax code contributes to a redistribution of income from poor and middle class Ohioans to those in the upper class.

A new analysis by Policy Matters Ohio found that the top 1 percent — those who made at least $388,000 last year — would see a total tax cut of more than $10,000. Meanwhile, the middle 20 percent, those making between $37,000 and $58,000, would see a tax cut of $20 on average, while the bottom fifth, or those making less than $20,000, would see an average increase of $20.

“Our tax system is reinforcing inequality,” Schiller said. “Do we want a tax system that makes inequality worse?”

The latest cut

The new 6.3 percent cut signed into law by Kasich at the end of June brings the top rate for a single filer down to 4.997 percent, retroactive to the beginning of the year. It was 5.33 percent last year, which ranked 28th among the states, according to data compiled by the Tax Foundation.

But Gary Gudmundson, spokesman for the Ohio Department of Taxation, said it’s important to remember that 10 states have a flat income tax rate. That makes comparisons problematic, he said, because everyone in those states pays the so-called top rate. In Ohio, which has a graduated rate, only earners with an income above $208,500 paid the highest rate last year.

“You can be a relatively low-income earner in a state with a flat tax and you’re paying 5 percent,” Gudmundson said, “whereas in Ohio you might be paying 2 percent.”

Scott Drenkard, an economist and manager of state projects with the pro-business Tax Foundation, said part of the problem in Ohio is the state hasn’t cut the right taxes to create the most business expansion.

Kasich has repeatedly proposed “tax swaps”, Drenkard said, in which one tax is cut or eliminated while another is raised or created. But, he said, there are right ways and wrong ways to do this.

“The Kasich model has generally been to cut personal income taxes — this has been a component of every package he’s put forward in the last 2½ years — and then try and pay for those cuts by raising other taxes that are in many cases harmful to economic growth,” Drenkard said.

Kasich proposed some new taxes, such as the severance tax on oil and gas drilling, as well as raising the commercial activity tax, which weren’t approved by the legislature.

And while Kasich has proposed — and received — “robust” personal income tax cuts, Drenkard argues that his proposals to replace their revenue have been expensive and not particularly helpful.

“So you replace a bad tax with another bad tax and it’s not surprising you’re not getting the kind economic growth that you’d be considering,” he said.

Greg Lawson, research director for the conservative Buckeye Institute, said his organization wants to phase out the personal income tax altogether.

Lawson said studies show corporate taxes and income taxes hurt the economy when they’re raised, and help the economy when they’re lowered.

But, he said, “We never say that if you cut the taxes, you are immediately going to have this explosive growth. What you do when you cut, though, is you create a better foundation for growth, when you combine that with other pro-growth policies,” such as labor and regulatory reform.

Lawson is also skeptical of Schiller’s claim that the tax system helps the rich and hurts the poor.

“We don’t buy all that,” he said. “Quite frankly, we think it’s interesting rhetoric, but the goal should be to create a larger overall economic pie. Our goal should never be to parcel out the same size pie. It should be to grow it across the board.”

Conflicting studies

When it comes to studies of tax cuts and economic benefits, you have to choose sides.

A 2012 special report by William McBride for the Washington D.C.-based Tax Foundation, for example, found that “the results consistently point to significant negative effects of taxes on economic growth.”

“In this review of the literature,” McBride states, “I find 26 such studies going back to 1983, and all but three of those studies — and every study in the last 15 years — find a negative effect of taxes on growth.”

But in a study updated in May, the Center on Budget and Policy Priorities, which pushes policies that it hopes will reduce poverty and inequality, found that cutting personal state income taxes to boost economic growth “has not worked particularly well in the past.”

“In the last two decades, a number of states have cut taxes deeply in hopes of spurring economic gains, with unimpressive results,” the study by Michael Leachman and Michael Mazerov states.

Mazerov, a senior fellow at the Washington D.C.-based center, said the findings of McBride and others are flawed.

“I think it’s fair to say the trend of the literature is increasingly finding that income taxes, personal income taxes in particular, don’t have an impact on state economic performance,” Mazerov said last week.

And there’s good reason for that, he said.

“The vast majority of people who pay personal income taxes, you know, we’re salaried employees,” Mazerov said. “We negotiate our best salary we can with our employer. But if our income tax level goes up, you know, we don’t move. We don’t create a job for ourselves. We work for other people.”

Mazerov also thinks the Ohio experience is proof of his findings.

“If any economic growth effect were going to show up,” he said, “it would have shown up a long time ago.”

‘The most onerous of all taxes’

Kasich spokesman Rob Nichols said the governor’s policies have worked.

“Prior to us getting in office, Ohio lost 350,000 private-sector jobs, and we’re up 362,000 private-sector jobs while we’ve cut the state income tax by 16 percent,” Nichols said.

Although the administration’s own data shows the state will continue to lag behind the nation as a whole, Nichols said the governor never said they were done.

”There’s a lot more to do,” he said. “And it goes beyond taxes. Taxes are important, but it’s your regulatory policy, how hospitable you are to businesses. And budget stability is a very important thing.”

Nichols brushed off criticism of the administration’s focus on decreasing the income tax.

“We would argue that it needs to come down even more,” he said. “We deem the income tax to the most onerous of all the taxes.”