Report: Eliminating income tax is 'roadmap to ruin'
Monday, May 3, 2010
According to a new report from the Center for Community Solutions, eliminating Ohio's income tax would devastate the economy and cut services to low-income residents.
The Apr. 22 issue of State Budgeting Matters, entitled "Roadmap to Ruin: HB 400 and the Plan to Eliminate the Income Tax," is by Jon Honeck, Ph.D., director of public policy and advocacy for the Center for Community Solutions, a nonprofit think tank in Cleveland.
HB 400 (128th General Assembly), introduced by Rep. John Adams, would reduce the state income tax by 10 percent each year through tax credits until the tax is completely eliminated. The income tax is Ohio's largest source of tax revenue, representing 39 percent of state's general revenue fund (GRF). According to the Legislative Service Commission, phasing out the tax would reduce the GRF by $11.5 billion by FY2020.
According to the report, state and local taxes in Ohio take a greater share of income from poor households, while the income tax is the only state tax with graduated tax rates.
According to the author, "Proponents claim that HB 400 is being offered in the name of boosting economic development, but in reality it would have the opposite effect. The resulting cuts to the state budget would devastate Ohio's quality of life. They would undermine the basic services that Ohioans have come to expect from government, including education, criminal justice, economic development and infrastructure projects, parks and recreation, and health and social services."
The report continues, "The state's ability to share revenue with local governments will be dramatically altered as well. Local governments have limited ability to respond to the loss of state services by raising their own revenues. Ohio would be increasingly polarized into ‘haves’ and ‘have nots.’ Areas that have suffered the highest levels of job loss and social distress would be left to fend for themselves."
The report also includes the following points:
- Ohio's tax rate is close to the national average.
- Government spending matters to the economy. Ohio's General Revenue Fund accounts for 4.5 to 5 percent of Ohio's gross domestic product.
- The income tax has a broad tax base (wages and unearned income) and has been very responsive to economic activity.
- It is "unrealistic" to expect other state taxes to compensate for the loss of the income tax.
Studies dispute "dynamic effect" claims, which say that reducing income tax rates increases economic growth.
- An across-the-board reduction in the state's GRF to compensate for the loss of income tax revenue would affect all agencies and branches of government, including the offices of the state auditor, attorney general, secretary of state, legislature, Supreme Court, and local governments and political subdivisions. It would affect Ohio's ability to meet federal matching requirements for social programs, finance capital building projects, meet bond holder payments, and make tax subsidy payments, such as the rollback and homestead credit.
Without an income tax, "Ohio will become more reliant on slower-growth, more regressive taxes."
The report recommends that policy makers "address the imbalance in its tax structure that places a disproportionate burden on low-income families. Rather than eliminating the income tax, the discussion should be about how to lower the sales tax rate and other taxes that are not based on an ability to pay."
This summary of the State Budgeting Matters report was provided by Joan Platz of the League of Women Voters of Ohio in today's edition of her weekly Education Update. Sign up to receive the update. The League of Women Voters supports a graduated personal income tax as part of the state's tax mix because it is fair and equitable.