The Tax Cut Debate in Ohio: Facts and Fiction

One of the eternal questions that you can spend a lifetime trying to find an answer to is: when is government big enough for a statist? We may never find an answer to that question, because the statists themselves don’t know. What they do know, though, is that they will always resist any effort to reduce the burden that government imposes on taxpayers and the free economy. The debate over state taxes in Ohio is an excellent example. Today the Cincinnati Enquirer is criticizing Governor John Kasich for wanting to lower The Buckeye State’s income taxes:

Lower Ohio’s burdensome personal income taxes. Create jobs. That’s what Gov. John Kasich proposed last week in an expansive plan to reform government and improve the state’s economy. Kasich said Ohio’s income tax burden is among the highest in the country. Actually, Ohio’s income taxes are about average, it turns out. We don’t pay as much in state income tax as Kentuckians, but we pay more than our neighbors in Indiana, Pennsylvania and Michigan, according to the Washington-based Federation of Tax Administrators. In fact, residents in 25 states and the District of Columbia pay higher income taxes than Ohioans; taxpayers in 24 states pay less, the group says.

The Cincinnati Enquirer does not link to any source at the Federation of Tax Administrators, which raises the suspicion that they have something to hide – or simply have not done their homework. Here at The Liberty Bullhorn we take our work seriously, so we dug up this 2010 state tax collection table from the FTA’s website. We then did our own calculations of state tax burdens for 2010, using raw data from the Bureau of the Census for tax collection and from the Bureau of Economic Analysis for personal income data. Our results are basically the same as in the FTA table (in other words, the FTA almost got it right):

State taxes as share of state personal income, 2010
1 Alaska 14.3% 18 New Mexico 6.4% 34 Maryland 5.4%
2 Vermont 10.0% 19 Connecticut 6.3% 35 Oregon 5.3%
3 North Dakota 9.2% 20 Indiana 6.2% 36 Oklahoma 5.3%
4 Hawaii 8.5% 21 Montana 6.2% 37 Nebraska 5.2%
5 Wyoming 8.4% 22 Massachusetts 6.0% 38 Louisiana 5.2%
6 West Virginia 7.8% 23 Idaho 5.9% 39 Alabama 5.1%
7 Delaware 7.8% 24 Iowa 5.9% 40 Tennessee 4.7%
8 Arkansas 7.6% 25 Pennsylvania 5.8% 41 Virginia 4.6%
9 Minnesota 7.6% 26 Nevada 5.8% 42 Arizona 4.6%
10 Maine 7.2% 27 Kansas 5.8% 43 South Carolina 4.5%
11 Mississippi 6.8% 28 Rhode Island 5.8% 44 Missouri 4.4%
12 Kentucky 6.8% 29 New Jersey 5.8% 45 Georgia 4.4%
13 New York 6.8% 30 Ohio 5.7% 46 Florida 4.4%
14 Wisconsin 6.6% 31 Utah 5.6% 47 Texas 4.1%
15 Michigan 6.6% 32 Washington 5.6% 48 South Dakota 4.0%
16 California 6.6% 33 Illinois 5.5% 49 Colorado 4.0%
17 North Carolina 6.4%       50 New Hampshire 3.7%

The total state tax burden on personal income in Ohio is 5.7 percent, which is the 30th highest rate in the country. A similar calculation with state income tax collections puts Ohio 29th among the 43 states that had an income tax in 2010.

In other words, from the superficial viewpoint that The Cincinnati Enquirer takes, things look fairly good. However, there are two important reasons why Ohio comes across as a moderate-tax state and not a high-tax state.

However, when we look at state government from the other side of the equation, all of a sudden things look slightly different. There are, as we know, three funds categories of government spending: General, Federal and Other. Historically, the General Fund has been “the” budget, but in recent years there has been a growing awareness of the two other funds. One reason is that politicians in some states (such as West Virginia and Colorado) route a large or growing share of state spending through Other Funds. Since Other Funds are, in theory, funded by fees and not taxes, and since the purpose is, in theory, to fund current operations of the government bureaucracy, it has been relatively easy for state legislators to move spending off the General Fund and in to the Other Funds.

Ohio appears to be safe from this practice, but it is nevertheless worth keeping in mind that Ohio taxpayers pay, out of their pockets, for both General Fund spending and Other Funds. Adding together General and Other Funds spending in 2010, and comparing to other states, Ohio’s relatively favorable ranking suddenly changes (state spending data from the National Association of State Budget Officers):

In-State Sourced State Government Spending as Percent of State Personal Income, 2010
1 West Virginia 26.8% 18 North Dakota 10.4% 34 Maryland 8.2%
2 Wyoming 24.6% 19 Mississippi 10.4% 35 Kansas 7.9%
3 Alaska 21.7% 20 Louisiana 10.3% 36 Pennsylvania 7.8%
4 Delaware 19.9% 21 Colorado 10.2% 37 Arizona 7.7%
5 Oregon 17.3% 22 Iowa 9.9% 38 Georgia 7.6%
6 Hawaii 15.1% 23 North Carolina 9.4% 39 Idaho 7.6%
7 New Mexico 14.2% 24 New York 9.4% 40 New Jersey 7.6%
8 Massachusetts 13.8% 25 Nebraska 9.1% 41 Alabama 7.4%
9 Arkansas 13.6% 26 Minnesota 9.1% 42 Indiana 7.4%
10 Wisconsin 13.1% 27 Virginia 8.9% 43 California 7.4%
11 Utah 12.6% 28 Connecticut 8.7% 44 Tennessee 7.0%
12 Rhode Island 11.3% 29 Washington 8.5% 45 Missouri 6.6%
13 Vermont 11.2% 30 Oklahoma 8.4% 46 South Dakota 6.5%
14 Kentucky 11.0% 31 South Carolina 8.4% 47 Texas 5.9%
15 Montana 10.8% 32 Illinois 8.3% 48 New Hampshire 5.9%
16 Maine 10.5% 33 Michigan 8.2% 49 Nevada 5.5%
17 Ohio 10.4%       50 Florida 5.5%

And we have not yet even looked at the burden of local governments. If we add locally funded local government spending to in-state sourced state government spending, and again divide by personal income (phew!), we get:

State and local gov. spending, excl. fed funds, pct of personal income
1 Alaska 21.5% 18 Illinois 12.7% 34 Montana 11.7%
2 Wyoming 18.6% 19 Vermont 12.7% 35 Utah 11.6%
3 New York 16.9% 20 Hawaii 12.5% 36 Connecticut 11.5%
4 California 14.5% 21 Nebraska 12.5% 37 Delaware 11.5%
5 North Dakota 14.1% 22 New Jersey 12.5% 38 Arizona 11.4%
6 Nevada 14.1% 23 West Virginia 12.4% 39 Alabama 11.4%
7 Minnesota 13.6% 24 Louisiana 12.3% 40 Texas 11.3%
8 Mississippi 13.5% 25 Washington 12.2% 41 New Mexico 11.3%
9 Indiana 13.4% 26 Idaho 12.1% 42 Arkansas 11.3%
10 Florida 13.3% 27 Pennsylvania 12.0% 43 Tennessee 10.9%
11 Michigan 13.2% 28 Oregon 11.9% 44 Massachusetts 10.9%
12 Wisconsin 13.0% 29 Kentucky 11.9% 45 Missouri 10.7%
13 Maine 13.0% 30 Georgia 11.9% 46 Maryland 10.7%
14 Iowa 12.9% 31 Colorado 11.8% 47 Oklahoma 10.7%
15 Ohio 12.9% 32 South Carolina 11.8% 48 Virginia 10.4%
16 Kansas 12.9% 33 Rhode Island 11.8% 49 New Hampshire 9.7%
17 North Carolina 12.7%       50 South Dakota 9.6%

Ohio is now even further up the scale, essentially tied for 14th place with Iowa and Kansas.

This is the true government burden on taxpayers in Ohio. Given that Ohio, according to Bureau of Economic Analysis data, has one of the two worst GDP growth rates over the past decade (Michigan is The Buckeye State’s only competitor at the bottom) it is worth taking the government burden on Ohioans very seriously.

There is one last point to add to this. Even if we stay focused on state income taxes, and even if they on average impose a moderate burden on taxpayers, the structure of the income tax is in itself a burden. Ohio has nine income brackets, which makes the state’s income tax one of the most work-discouraging in the country. Hawaii imposes an astounding 12 brackets, Missouri has 10 and Iowa matches Ohio’s 9 brackets.

However, Iowa flattens out its tax (imposes the highest bracket) at less than $29,000, and Missouri reaches its highest bracket at a low $9,000 annual income (both for single filers). Ohio, by contrast, spreads its brackets out over incomes up to $200,000 (single filers).

This means, in plain English, that while comparable states stop penalizing people who work hard, educate themselves, start businesses and pursue a career at some point, Ohio keeps going after them deep into the six figures.

It is pure fiction to say that Ohio does not need tax cuts. Ohio taxpayers do need tax cuts, and they need them badly. Is it too much to ask of the opponents to tax cuts that they do their homework before they try to stop Governor Kasich from making lives a little easier for Ohio families?