Principled principles
Friday, June 27th, 2008 By Mike Maurer
One of the first things to do in looking at questions of revenue or expense is to forget the loose change and focus on the guts. (Of course there are also powerful arguments for looking at the margin, too, but one thing at a time.) When it comes to state of Ohio taxes, state revenue is basically half sales tax and half income tax.
So when legislators propose to eliminate the income tax, are they proposing to eliminate half of the state’s revenue? Some Ohio legislators seem to think so.
“Certainly there is going to have to be some replacement revenue for us to be able to move forward,” [said Rep. Jay Hottinger, R-Newark] . . .
Asked if it was really possible to eliminate the income tax, [Rep. Matt Dolan, R-Novelty] said, “Given the conditions today, no. But I think it’s very possible we could get Ohio competitive into a 3 to 3.5 percent range.”
This isn’t really the question. It’s all a matter of timing. Are proponents of eliminating the income tax proposing to cut 50 percent of state revenue tomorrow? Not very likely. While it’s true that they could double the sales tax and keep overall revenue the same immediately, a more likely approach would be to simply tighten up the growth belt.
Assume actual state spending grows 3 percent a year, not a bad estimate, given that the last two budget cycles have been historically low at something approaching 2 percent per year, not including about half of the state’s overall budget, which tends to grow faster. Assume that revenues grow at the same rate. The rule of 72 says that state expenditures will double in 24 years. All that would be required is to shift the growth in sales tax every year to a reduction in the income tax. Voila - the income tax is eliminated in 24 years, and sales tax rates haven’t changed.
The only thing that’s changed is that government shrank as a share of the overall economy. That’s a good thing, not a bad one. But even if one chooses the path of those who believe in government over individuals, the income tax could be eliminated by raising the sales tax rate gradually while reducing the income tax rate gradually. In that unhappy circumstance, government would hold the same share of economic activity, but at least that share wouldn’t grow, and again the income tax would be gone.
Tags: income tax, sales tax
June 27th, 2008 at 3:15 pm
Unless the state shrinkage is caused by the state pushing expenses down to the counties, cities and school districts. It’s easy to cut the budget if you can indirectly mandate that other taxing authorities increase theirs.
June 27th, 2008 at 3:44 pm
Certainly true. This is what I call the matching problem, or the partner problem. But it always exists under any stress, which is to say, under any scarcity, which is to say, all the time. Is it worse when major changes are proposed? Maybe, but I would say only when the people are being fooled. There isn’t really anything wrong with shifting tax and associated expense from the state to the locals, indeed that would probably be good. It’s only when the state pretends to be holding its own but isn’t that it’s a problem.