Columbus, OH – On Tuesday, The Buckeye Institute testified (see full text below or download a PDF) before the Ohio House Ways and Means Committee on the policies in Ohio House Bill 386, which proposes to eliminate both the state income tax and the commercial activities tax (CAT) simultaneously.
Although House Bill 386 moves in the right direction, Greg R. Lawson, a research fellow at The Buckeye Institute, strongly urged lawmakers to “reconsider eliminating both taxes simultaneously,” noting that eliminating both taxes would “require dramatically changing budget priorities and holding spending at or below inflation.”
Lawson instead encouraged lawmakers to:
- Eliminate the income tax gradually to correspond with a reasonable, responsible budget and spending restraint.
- Install revenue triggers to act like tax-cut circuit breakers if the state faces unexpected economic headwinds.
- Close tax loopholes to raise revenue and ease Ohio’s path to eliminating the income tax.
- Phase out property tax reimbursements over many years to raise revenue in a way that is less painful to homeowners.
- Eliminate the commercial activities tax quicker, which raises less revenue than the income tax.
In closing, Lawson noted that after repealing the CAT, “the General Assembly should gradually and responsibly reduce the state’s income tax to zero.”
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Ohio Needs Sustainable Tax Reform in Uncertain Times
Interested Party Testimony; Ohio House Ways and Means Committee; Ohio House Bill 386
Greg R. Lawson, Research Fellow; The Buckeye Institute; June 4, 2024
As Prepared for Delivery
Thank you, Chair Roemer, Vice Chair Lorenz, Ranking Member Troy, and members of the Committee, for the opportunity to testify on Ohio House Bill 386.
My name is Greg R. Lawson, I am a research fellow at The Buckeye Institute, an independent research and educational institution—a think tank—whose mission is to advance free-market public policy in the states.
Ohio has taken great strides to improve its tax policy over the past two decades. In 2005, Ohio had nine state income tax brackets with a top marginal rate of more than seven percent. Today, Ohio has three brackets with a top marginal rate of 3.75 percent, and next year there will be only two brackets and a top rate of 3.5 percent. But as I recently testified before the Joint Committee on Property Tax Review and Reform, other states have embraced competitive tax reforms and flat taxes, so Ohio must continue reducing its overall tax burden, including relatively high local taxes.
House Bill 386 moves in the right direction by eliminating the state income tax and the commercial activities tax (CAT), and although The Buckeye Institute has recommended ending both of these inefficient tax regimes, it strongly urges the General Assembly to reconsider eliminating both taxes simultaneously. These tax reforms must be done responsibly. Adopting both measures at once would require dramatically changing budget priorities and holding spending at or below inflation. In more than 20 years of analyzing Ohio’s state budgets, I have yet to see one with spending discipline strict enough to absorb the end of both taxes so quickly.
This Committee is aware that state income tax revenues are coming in significantly below projections, which could create challenges for future budgets. Expenses for Medicaid, K-12 education, childcare, and housing are all rising, and those balloon costs must be kept in mind as the General Assembly approaches the next budget cycle. Ohio cannot and should not repeat the mistakes that Kansas made in 2012, when it failed to pair aggressive tax reform with responsible spending restraint. Major tax reforms can pay for some of their costs on a dynamic basis over time, but they do not pay for themselves entirely in the short run, which means that without near-term budget belt-tightening states will run deficits and tax reforms risk repeal.
The lesson Kansas learned has scared some—but not all—legislatures across the country from moving forward with bold tax reform. Iowa and North Carolina, for example, have implemented major and successful tax changes without the backlash suffered in Kansas, and Ohio now has its flattest, lowest income tax since 1971. To improve House Bill 386 and avoid Kansas’ former fate, The Buckeye Institute recommends the following:
- Eliminate the income tax gradually.
- Install revenue triggers.
- Close tax loopholes.
- Phase out property tax reimbursements.
- Eliminate the commercial activities tax quicker.
Eliminate the Income Tax…Gradually
Ohio’s state income tax brings in roughly $11 billion per year. Eliminating the tax should be strategically timed to correspond with a reasonable, responsible budget and spending restraint. That strategic timing will take time and a reprioritized fiscal agenda or risk the structural imbalance suffered in Kansas a decade ago.
Academic literature fully supports cutting income taxes to spur economic growth. The Buckeye Institute’s own research has demonstrated the benefits of income tax cuts and a meta-analysis of academic studies by the Tax Foundation has shown an inverse relationship between higher GDP and higher income taxation across numerous countries. But the additional growth will not fully offset the lost tax revenue, so public spending must be disciplined and consistent with the tax cuts.
Install Revenue Triggers
Aggressive tax reform states have installed prudent revenue triggers that act like tax-cut circuit breakers in the event that the state faces unexpected economic headwinds. Well-designed triggers prevent irresponsible tax cuts, reduce volatility during major tax reform periods, and help balance economic growth and the revenue predictability needed for reasonable budgeting. Their structure varies from state to state, with some triggers tied to defined revenue or growth rate targets, but they should ensure a solid revenue baseline, offer a politically defensible benchmark for anticipated future revenue, and be indexed to inflation and/or population growth.
Close Tax Loopholes
The most recent Buckeye Institute Piglet Book highlighted more than $11 billion forfeited each fiscal year courtesy of tax expenditures, commonly known as loopholes. Every tax loophole effectively admits that the tax code has a problem and that certain, select taxpayers require special treatment. Ohio cannot close all the loopholes and the tax expenditures will decrease with falling tax rates, but the Piglet Book identified $2 billion in tax loopholes that can and should be closed to raise revenue and ease Ohio’s path to eliminating the income tax. ; ; Phase Out Property Tax Reimbursements
Ohio property taxes are too high. Some local taxes are offset by a direct state subsidy given to all local governments when they pass renewal levies. More than $1.8 billion in general revenue funds flow as state revenue distributions in Ohio’s operating budget. Prior tax reforms eliminated some previous subsidies for new and replacement levies a decade ago, and eliminating the remaining subsidies will be politically difficult insofar as it would mean a functional property tax increase on homeowners. But gradually phasing out the reimbursement over many years will be less painful and more politically palatable.
Eliminate the Commercial Activities Tax Quicker
Eliminating Ohio’s income tax responsibly should take some time. But eliminating the commercial activities tax can be done more quickly and less expensively. As The Buckeye Institute explained in 2020, the CAT is an uncompetitive, regressive tax that causes economic dislocations and forces consumers to pay artificially high prices—costing the average Ohioan $300 per year. And because it taxes total sales rather than profits, Ohio’s CAT is especially damaging to unprofitable businesses that may face large tax bills even during economic distress. The nonpartisan Tax Foundation has highlighted and lamented, the CAT’s negative effects and has consistently reduced Ohio’s business tax score as a result. The General Assembly has already taken steps to reduce the CAT’s burden on most small businesses by eliminating the minimum tax due and excluding the first $3 million in gross receipts this year and the first $6 million next year. Given this momentum, eliminating the CAT entirely will not cost the state as much revenue as eliminating the income tax. Once the CAT is repealed, the General Assembly should gradually and responsibly reduce the state’s income tax to zero.
Thank you for your time and attention. I would be happy to answer any questions that the Committee might have.
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