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Kasich's "Tax Cut" Still Grows Ohio Government

edbell | 20 February, 2013 11:08

Guest Commentary: by Seth Morgan

Much is being made about Governor Kasich’s “tax cut.” This is a major policy step that will impact the state for years to come.

The Governor deserves credit for recognizing that income taxes need to be reduced and that tax reform in Ohio is necessary.  Further, during these difficult economic times, with plenty of calls for increased government funding from all corners of the state, we should thank the Governor for being willing to make tax reform part of his budget.  Certainly this is more than can be said for his predecessor Ted Strickland, who in the face of budget problems left Ohio with an $8 billion budget hole while raising taxes.

The Governor’s plan to reduce taxation on pass through entities, which most small business owners use to organize their businesses, also helps to begin righting a long standing wrong.  Currently, these business owners are facing double taxation – they pay the “commercial activity tax” which operates like a sales tax on business receipts and then turn around and pay personal taxes on the income produced by the company they own.  Good for the Governor for addressing this issue in his tax reform proposal.

Unfortunately, the Governor’s plan, while cutting income taxes, is basically “revenue neutral.” This means that if we look at state tax dollars and compare the FY 2014 proposed budget to the FY 2013 estimated actual, those tax revenues collected by the state are actually an increase of $196 million.  Out of a $63 billion dollar budget, we’ll call that revenue neutral (not to minimize the enormity of $196 million, but remember these are projected amounts.)

How can the Governor promise to cut 20% of the income tax rate over three years but still increase to at least neutrality the state revenue?  He does this mostly by increasing sales tax revenue.  While he has proposed that the rate drop by half of one percent he has broadened the sales tax base significantly.  Matter of fact, the state is projecting a 22% increase in sales tax dollars to the state coffers alone in FY 2014.  If we simply compare the projected taxes earned in 2013 through income and sales tax to those budgeted in 2014, state revenue increases by roughly $315 million.

We must also factor in that the increase in the sales tax base not only raises the state sales tax revenue but that of your local county as well.  Remember the sales tax you pay at your local discount store is made up of two factors – state and local.  The Governor’s budget caps the growth of revenue the County can appreciate but nonetheless you will still see an increase in the taxes being collected by your local County.

Broadening a sales tax base but lowering the rate is in principal a good thing.  Hopefully, this effort to reformat the way Ohio raises revenue continues and we will see further decreases in sales and income tax rates.

The reduction in income taxes is the most laudable part of the budget proposal. Ohio’s income tax rate has long been too high which has an adverse impact on job creation.

Unfortunately, we haven’t really reduced the revenue of the state.  Tax cuts by their very nature, in the short term, require cuts to government spending.  The best approach would have been for Governor Kasich to propose lower income taxes, as he did, broadening the sales tax base, which he did, but lowering the sales tax rate or income tax rate even more.  And certainly he should not be raising taxes on oil and gas production.  We all know that “if you want more of something, you tax it less.”

But we don’t just think tax decreases are good for economic reasons.  By merely re-distributing who we collect the taxes from, we miss one of the biggest benefits of tax cuts – namely the opportunity to reduce the size, and thereby the power of the government itself.

You see even with the “tax cut,” Ohio’s budget grows.  In the general revenue fund, the budget grows by 10.6% in the first year.  Even when we remove the unprecedented amounts of federal money that the Governor’s miserable Medicaid expansion drives into Ohio’s budget, the budget still grows.

Tax cuts are good but unless they are accompanied by comparable cuts in spending, you are just slicing the pie a different way.  In this case, the slicing of the pie might look a little better than it did before – but that’s not what we wanted.  We wanted a smaller government pie and a bigger Ohio individual, family, and business pie.  The Ohio House of Representatives should use this tax “cut” proposal as an opportunity to actually shrink the drain on Ohio families by taxation – and through cutting government, actually increase the opportunities afforded to us all.

Nobody but the government wins when government grows – and bottom line of this tax “cut” is that government still grows.  We should do better than this.

Seth A. Morgan, CPA, serves as the State Policy Director for Americans for Prosperity – Ohio.  Morgan is an entrepreneur, sought after speaker, radio talk show host, and former State Representative and City Council Member.  While in the Ohio House of Representatives, Morgan served on the Finance & Appropriations Committee which had the duty of studying and dealing with Ohio’s budget.

 
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