No One Likes the Governor of Ohio's Tax Plan

by | March 5, 2015

By Jim Siegel

Gov. John Kasich's tax package took body blows yesterday from the left and right of the economic philosophical spectrum.

The conservative Tax Foundation, based in Washington, D.C., sharply criticized parts of the governor's tax package, particularly the elimination of the state income tax for most small businesses and sole proprietors and the increase in the commercial-activity tax.

Meanwhile, the liberal group One Ohio Now said the income-tax cuts are a poor strategy for economic growth, pointing to the state's job-growth performance since tax cuts started in 2005.

Kasich proposes $5.7 billion in income-tax cuts over the next two years, including a 23 percent across-the-board cut and a tax exemption for small businesses and sole proprietors that have up to $2 million in gross receipts.

Kasich would offset those cuts with $5.2 billion in tax increases, including a hike in and expansion of the state sales tax and boosts in taxes on commercial activity, fracking and tobacco.

House Republicans are trying to decide what to do with the tax package. Few outside groups have spoken up in favor of it, although there appears to be general support in the Republican ranks for some type of income-tax cut.

The $700 million tax cut for businesses is costly, said Scott Drenkard, manager of state projects for the Tax Foundation. The tax proposal would increase a current 50 percent exemption on the first $250,000 in income. "This is doubling the pot sweetener for a tax-avoidance scheme," Drenkard said. "It doesn't give you job growth. It doesn't give you economic growth. It just blows a hole in your budget."

Drenkard pointed to major budget problems in Kansas, saying that state underestimated the number of people who would take advantage of a similar business-tax elimination. People changed from classifying themselves as wage earners to sole proprietors, Drenkard said, a move that lets them avoid the state's income tax but doesn't create jobs.

A bigger across-the-board income-tax cut is preferable, said Drenkard, who also argued that an increase in the commercial-activity tax would boost "the most destructive parts of Ohio's tax code."

But some GOP legislators, including Rep. Gary Scherer, R-Circleville, were skeptical that people would change their status to sole proprietors to avoid the state income tax because that would leave them paying more in federal Social Security and Medicare taxes.

Gavin DeVore Leonard, state director of One Ohio Now, a coalition of human-service, labor and advocacy groups, said many of the studies cited by state officials in support of the shift from income to consumption taxes are not peer-reviewed. He said they cite decade-old data and sources, and one study is about Canada.

Leonard argued that predictions that income-tax cuts will make states more competitive have not panned out. Claims that Ohioans are leaving the state because of high income taxes are "highly inaccurate based on research," he said.

Leonard said he has never talked to a young adult who said he or she is leaving Ohio because of state taxes. "If that's a thing, I'm amazed by it."

More state spending on education and infrastructure is a better investment, he argued.

Legislators also heard a mix of support for and opposition to Kasich's proposed tobacco-tax increase -- a $1 per pack hike on cigarettes, to $2.25 -- plus a first-ever specialized tax on e-cigarettes, which would cause the price of the burgeoning products to nearly triple.

Kasich has argued that the e-cigarette tax is a matter of uniformity with cigarette taxes. A 30-milliliter bottle of liquid nicotine used in e-cigarettes that costs $18 to $20 would also see a $33.75 state tax.

Groups including the American Cancer Society and the American Academy of Pediatrics voiced support for the tax hike, arguing that it would result in fewer people taking up smoking. Tobacco companies and businesses that sell tobacco products oppose the tax increase, arguing that it would lead to more smuggling and shut down e-cigarette, or vapor, shops.

"Why don't we just tax everything that's bad for us really high?" Rep. Terry Boose, R-Norwalk, said facetiously.

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