BuckeyeBlog

Even as Columbus city officials moan and groan about budget crises and their need to increase the city’s income tax, the Columbus Department of Recreation and Parks has decided to take on a whole new project. An article in today’s Columbus Dispatch states that the city may be forced to close its parks department if Issue 1’s tax increase does not pass on August 4. However, the Department of Recreation and Parks has decided to build an entirely new two-acre park and make improvements to another. The department claims that the projects will draw from “charitable grants and special funds” rather than the city’s operating budget.

Right. But parks require maintenance, equipment, personnel and other overhead costs after that. Where will the department, supposedly at risk of getting shut down, obtain these funds? It doesn’t really matter. After all, spending money unsustainably seems to be Columbus’ modus operandi these days. And more than likely, it will use those budgetary shortfalls to advocate another tax increase in a few years.

The vote on Issue 1’s tax hike is fast approaching, and the city continues its rhetoric and threats about shutting down major government services. But the City of Columbus really does not help its case when, instead of streamlining its spending, decides to pile it on. Columbus taxpayers should be asking hard questions. Why build new parks, when we can’t even afford the exorbitant services and spending the city involves itself in? If city officials cannot recognize misplaced priorities when everyone else can, do they deserve a tax increase?

An article in the Columbus Dispatch today touched on a few interesting issues. The main point of the article was about how much money the state’s Medicaid program (and, by extension, the state’s taxpayers) could save if the state placed as many people in home and community-based long term care instead of nursing homes. Since nursing homes are far more expensive for most people, it is likely the state could save up to $140 million a year if it just met the national average for home and community-based care.

This is something I’ve written about before. The state should do all it can to ensure that Medicaid dollars (the largest item in the state budget) are being spent in the most cost-effective way possible. The long-term care system is not living up to that standard. But as the Dispatch points out, there is a potential problem in trying to get the state to the national average for home and community-based care: there aren’t enough younger people who would be needed to provide this care. As has been discussed in other contexts, younger people aren’t staying in Ohio nor are they coming to the state. It just isn’t a place that draws people to live in it.

What this points out is that state policymakers are going to have trouble addressing the state’s rising Medicaid spending issues without addressing the more fundamental issues plaguing the state. Reforms like eliminating the income tax, instituting right-to-work legislation, universal vouchers, and the like would make the state an attractive place for younger people. Fixing long-term Medicaid care is important; fixing the underlying issues that are hurting Ohio is even more important.

Apparently Lt. Governor Lee Fisher is concerned because there isn’t enough money to implement his economic development plans for the state. I’m confused as to why the state needs to spend tax money on economic development in the first place. Economic growth doesn’t come from the government; it comes from businesses and individuals interacting in the marketplace. In fact, one of the main impediments to economic growth is taxes, the shortage of which is preventing Lt. Gov. Fisher’s plans. But if the Lt. Governor really wants an economic growth plan, why doesn’t he support something like eliminating Ohio’s income tax? I’d wager that this move would do much more for economic development than all the government programs Fisher is supporting.

Buckeye Institute President David Hansen and adjunct scholar Dr. Richard Vedder discussed Ohio’s economic climate and the possibilities offered by the elimination of Ohio’s income tax with Karen Kasler on Friday’s broadcast of The State of Ohio. The video archive of this broadcast can be viewed by clicking on the picture.

The Newark Advocate weighs in today on the Buckeye Institute’s proposal to phase out the state income tax.  Here is their morning editorial:

Newark Advocate
August 27, 2008

Editorial

Tax talk is worth the price for now

A few weeks back, some in the state legislature suggested looking into eliminating the state income tax as a way to keep people and income in the state, as well as attract new people to Ohio to spur growth. Now comes the conservative think tank Buckeye Institute with the suggestion that it’s worth taking a look at the idea.

On its face it sounds like a lark. Regardless of how one feels about taxes, along with one other thing in life, they are certain. Government must exist, and it must be funded, and that means taxes. But taxes can be approached in different ways, and some are better than others.

The reason it’s been brought up is that Ohio needs to right its course. As one of the rustbelt states, it has struggled for years, in good times and bad, with a changing economy heading away from manufacturing and toward services. And now, the times aren’t so great.

With a struggling economy comes the loss of people who leave the state either in search of a replacement for a lost job or for a new job. Along with the weakened political clout that follows population loss, so to do we lose what could be their contribution to a growing state economy.So, why not take a close look at eliminating the state income tax? (more…)

Buckeye Institute President David Hansen explains to 610 WTVN’s Joel Riley how Ohio’s economy will boom if the state income tax is phased-out.  Hansen bases his argument on a recently release Buckeye Institute study.

Click the player to listen to the interview and hear caller reaction.

Sen. Obama has called for eliminating the income tax–for a select group.

Whatever the merits of that idea, some have objected to his setting an abrupt threshold for qualifying for the freebie:

Tax experts across the political spectrum also fault the Obama plan’s abrupt $50,000-a-year threshold. As described by the campaign, seniors making, say, $48,000 would pay no income tax, while someone with income slightly more than $50,000 could pay several thousand dollars in income taxes. Seniors nearing the $50,000 threshold would have incentive to quit working.

Some of these experts say there would be a phasing in/phasing out to eliminate this problem. The issue is far more broad than this, however. Every government benefit tied to some measure should have a similar phase in and phase out. The idea that we’re going to set a “poverty level” and then give benefits according to some multiple of it, is silly. Most of these things ought to be done away with altogether, but if we’re going to have them, then let’s phase them in gently, so that there are no silly discontinuities and the associated goofy incentives, where one person in line earned $39,001 and doesn’t qualify, while the next earned $38,999 and does qualify. For another great example, check out this health care clinic in Dayton, which just “missed the cut” for more than doubling its federal subsidy.

Ohio University’s Richard Vedder received the Adam Smith Free Enterprise Award from the American Legislative Exchange Council today, and he and Rep. John Adams, R-Celina, speak about ALEC, higher education, the income tax and transparency.

Next time you find yourself reading about principles behind tax policy, note the principle of “equity.”

What this usually means is you want to use the tax code to redistribute income. The richer you are, the more you pay. From each according to his means.

What these folks don’t tell you, though, is that this is precisely what a percentage tax accomplishes. Pay 10 percent of your income, rich or poor, and guess what? The richer you are, the more you pay. Earned $10,000? You pay $1,000 in tax. Earned $1 million, a hundred times more? You pay $100,000 in tax, a hundred times more.

What big government folks want is more than that, however. They want an acceleration in percentage, which is to say, not only do you pay more, but the government has a free hand in making you pay more than that still. Earned $10,000? You pay nothing, and in fact we’ll give you some tax credits. Earned $1 million? You don’t really need all that; why don’t we take 40 percent of it?

The Wall Street Journal nails this today, covering one of the most important perennial stories, the income taxes paid relative to income earned. Guess what? The rich pay far more than their share, and you won’t squeeze more out of them. They’ll just leave.

(And for everyone who says, “Gee, you can’t live on $10,000,” fine. Tax the low earners the same as everyone else, but put your redistribution schemes into the expense side of government by writing them a check. That way even the poor will be unhappy when taxes go up, and even the poor will be unhappy when they see how much of their money is spent on things they don’t agree with.)

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.