Statewide Economic Impacts of Repealing Ohio Personal Income Tax
Testimony before the
Ohio House of Representatives Ways and Means Committee
Regarding the Statewide Economic Impacts of Repealing Ohio Personal Income Tax Testimony
December 10, 2008
Presented by
Samuel R. Staley, Ph.D.
Senior Research Fellow, The Buckeye Institute for Public Policy Solutions
and
Senior Policy Analyst, Reason Foundation
Thank
you, Chairman and members of the Committee, for providing me with this
opportunity to testify on the economic effects of repealing the Ohio
personal income tax.
H.B. 534 is premised on a bold thesis:
Repeal of Ohio's personal income tax will create a competitive economic
environment that will foster economic growth, job creation, and even
tax revenues. Income tax repeal may seem like a radical step. In fact,
solid academic research supports considering it as a viable approach to
tax reform, particularly for a state facing anemic economic growth.
Taxes and Economic Growth
Importantly,
the low tax revenues and economic decline associated with today's
economic climate in Ohio is not a short-term phenomenon. Indeed, Gov.
Strickland was elected in part on his commitment to revitalizing a
state economy that has been sub-par for more than a decade. Ohio's rate
of personal income growth has been about half the national rate for the
past two decades. Our per capita income is now below the national
average.
Meanwhile, our tax burden has steadily increased,
moving Ohio from 50th to 22nd in total burden. An important driver of
this rising tax burden is the Ohio individual income tax, which ranks
among the nation's most progressive and onerous.
Effects on Economic Growth
We
believe that repealing the state income tax is crucial for the
long-term competitiveness of Ohio's economy. In one stroke, it would
move us from the ranks of states that levy the biggest penalties on
wealth creation to one that encourages wealth creation. These results
are detailed in Eric N. Fisher's recent policy report, A Proposal to
Phase Out Ohio's Income Tax, released by The Buckeye Institute in
August 2008.
Using quantitative analysis, Professor Fisher found that repeal of the Ohio income tax would have three important impacts:
Our relative population loss would slow, even reverse, through stronger incentives for Ohio residents and young-adults to stay in the state;
Our long-run rate of economic growth would increase as Ohio becomes more economically competitive for investment compared to other states; and
Ohio would retain more of its "best and brightest" citizens, as our highest productivity individuals remain in the state to start their own businesses, or remain Ohio residents to nurture their peers and new ventures.
These effects are more
than just speculation, as Dr. Fisher's analysis shows (building on the
work of Professor Richard Vedder in his policy report Grinding to a
Halt: Ohio's Tax Policy and Its Impact on Economic Growth published by
The Buckeye Institute in 2005). States that have low tax burdens and
minimize their dependence on the income tax experience higher rates of
personal income and employment growth. Right now, the gap between
Ohio's growth rate and the nation's is growing. By eliminating the
income tax, we can begin to close that gap.
The chart below
shows the projected growth in Ohio's economy (GSP) under the scenario
of a 10-year phase down of the Ohio state personal income tax. The
phase down begins in 2010 and finished in 2020 (at the vertical line).
The
effects of phasing out the income tax are, in fact, modest, but have
important and significant long-run consequences. For example, moving to
a zero income tax environment would boost Ohio's expected annual growth
rate from 2.1% to 2.45%. Population growth would increase from 0.47%
per year now to a little over 1.0% per year once the income tax is
phased out. Nevertheless, these economic effects are significant enough
to restore Ohio's competitiveness.
Equally as important for
state legislators, these effects are enough to generate sufficient
growth to increase tax revenues to pay for projected state government
spending. Indeed, as the chart suggests, the growth in other
sources of taxes (e.g., sales tax and the Commercial Activity Tax) can
keep the state budget in surplus.
Effects on the State Budget
On a practical level, state policymakers need to consider the effects of repeal on the state budget. Once again, Professor Fisher's analysis provides some insight into the potential fiscal effects of repeal.
First
and foremost, over the long run, state income tax repeal will encourage
economic growth higher than current levels and forecasts.
This will
have two effects.
Higher economic growth will generate higher levels of tax revenues from the remaining taxes, particularly the sales tax; and
The Commercial Activity Tax will capture higher revenues as it becomes fully phased in.
Indeed,
The Buckeye Institute estimates that after 2020, a repeal of the state
personal income tax would generate surpluses, in excess of $16 billion
by 2028, and if state spending is kept to the modest levels currently
projected by the Strickland Administration (see Figure 2).
In
the interim, short of reducing overall state government spending, Ohio
might have to consider other revenue sources to fill the gap (either
raising the sales tax or increasing the cap on the Commercial Activity
Tax). Yet, if the income tax spend down is phased in, these adjustments
can be made based on actual revenue generation.
Conclusion
In
sum, repealing the personal income tax would be a bold policy choice
for the state of Ohio. The economic consequences, however, would be
positive as the Ohio economy becomes more competitive, encouraging
wealth creation and job creation on a broad level. While state
legislators would be faced with the challenges of keeping state
government spending at modest levels (about 2.1% growth per year), the
long term payoff would be a more robust economy.
Thank you. I am available for any questions you might have.
Samuel R. Staley, Ph.D. is a senior fellow at the Buckeye Institute and director of Urban and Land Use Policy at Reason Foundation in Los Angeles. An Ohio native and resident, he is co-author of the forthcoming book Mobility First: A New Vision for Transportation in a Globally Competitive Twenty-first Century (Rowman & Littlefield) and co-author of The Road More Traveled: Why the Congestion Crisis Matters More Than You Think, and What We Can Do About It (Rowman & Littlefield, 2006).
