By Greg R. Lawson

Thank you Co-Chairs Peterson and McClain, and members of the Ohio 2020 Tax Policy Study Commission for the opportunity to discuss tax expenditures with you today. My name is Greg R. Lawson. I am the Statehouse Liaison and a policy analyst at The Buckeye Institute for Public Policy Solutions, a free-market think tank that believes low taxes and limited government regulations will lead to a more prosperous Ohio.

To foster that low-tax, limited-government environment, The Buckeye Institute has long championed a lower, flatter, simpler tax structure with fewer distortions, exemptions, and carve-outs. We believe that such a structure will prove more efficient, fairer for taxpayers, and ultimately spur greater economic growth throughout the state. We commend the General Assembly and Governor Kasich for the tax reform steps that they have already taken, and we recognize that many of the next steps may be even more difficult. Tax expenditures, unfortunately, only exacerbate what is likely to be an already arduous reform process.

Every tax expenditure is really just an exception to the tax code that narrows the tax base. The narrower the tax base the higher and more confiscatory taxes become for those still subject to the tax. Thus, tax expenditures, however unintentionally, eventually pick “winners” and “losers” through their preferential tax treatment. Flatter taxes, by contrast, levied on broader bases and without special exemptions, lower the tax burden and spread the cost more evenly among the taxpayers.

Unfortunately, tax expenditures at the state level abound. The Tax Commissioner’s report details at least 128 tax expenditures,[1] many of which were initially created for good reason. But once these tax expenditures are ensconced in statute they grow immune to scrutiny and subject to ferocious lobbying to retain them—some have been on the books since the days of the horse and buggy. Practically by definition, some constituency set to gain from the tax preference calls for the creation of each tax expenditure. Once created, of course, that constituency has every financial incentive to protect their favorable tax treatment, making it politically difficult to ever eliminate the tax expenditure. The vicious cycle is perpetuated as others look for their own special treatment, making the tax base narrower and narrower as the government continues to pick its tax “winners” and “losers.”

Despite a cursory review during the initial budget blue print drafting every two years, there are few, if any, state-level performance audits that review tax expenditures for efficiency, effectiveness, or fairness. In 2011, The Buckeye Institute joined with others across the ideological spectrum to outline a performance audit process for tax expenditures and call for an automatic sunset provision for those that do not garner an affirmative vote by the General Assembly to retain them. At that time, The Buckeye Institute, the Center for Community Solutions, and the Greater Ohio Policy Center proposed the following commonsense reforms:

• Define tax expenditures consistent with current Executive Budget estimates;
• Limit the duration of tax expenditures to 8 years unless re-enacted by General Assembly;
• Establish a schedule of sunset dates for current tax expenditures;
• Provide for a Joint Tax Expenditure Review Committee comprised of the Chairs and Ranking Minority Members of the Ways and Means and Finance Committees of the House and Senate, plus two members appointed from each chamber;
• Provide for the Joint Committee’s periodic cost-benefit analysis of all tax expenditures.

We still stand by these reforms today, and continue to call for a more active review process for tax expenditures. We appreciate that current beneficiaries of individual tax expenditures will likely oppose such reforms, but we think that the legislature should have a routine process for examining, revising, and even eliminating tax expenditures.

House Bill 9, sponsored by Representative Boose, contains many of these proposed reforms, but it does not include the crucial sunset provision that will help ensure that all tax expenditures are reviewed and reconsidered. We think that such a provision will help reduce the risk of an ad hoc review and provide a more systematic and thorough process—away from the fever pitch of biennial budget drafting. We also think that these reforms may help eliminate some of the more notorious tax expenditures such as the “NetJets” exemption and the political contribution income tax credit, and allow the General Assembly to better understand the full effect of all tax expenditures on state revenues.

There is at least one massive tax expenditure, for example, that the General Assembly may not even realize is tax a expenditure because the Ohio Department of Taxation does not count it among the state’s tax expenditures—the carryout food tax exemption. As the Commission knows, carryout food is exempt from state sales taxes. But because this exemption lies in the state Constitution and it cannot be changed by statute, it does not meet the technical definition of tax expenditure. If it walks like a duck and talks like a duck, chances are it’s a duck. Any tax exemption, exclusion, or credit, of course, is at bottom a tax expenditure,[2] but an arbitrary distinction keeps the carryout food sales tax exemption out of the Tax Commissioner’s tax expenditure report—which means that the General Assembly is unlikely to appreciate its full cost during the biennial budget process. Consequently, The Buckeye Institute recommends including the amount of the carryout exemption in all future TE reports issued during the budget process.

Although a tax exemption for groceries, for instance, combats concerns over regressive taxation, there is no similar concern over “eating in” vs. “eating out” at restaurants. The carryout exemption ultimately gives some restaurants a tax break advantage over others— once again government tax policy picking its winners and losers. Most other states do not give their carryout establishments such a leg-up on the competition. Only Georgia, New Jersey, and Vermont exempt carryout from sales tax, with Illinois having a 1% discount. Ohio should abandon this out-of-step minority.

The carryout food exemption probably costs Ohio hundreds of millions of dollars in tax revenues every year that could be used to further broaden, flatten, and even-out the tax base. The Tax Commissioner’s most recent tax expenditure report shows Ohio will forego nearly $8.9 billion in revenue in Fiscal Year 2017.[3] Adding the carryout exemption would likely push that total closer to $10 billion lost to tax expenditures. Certainly some of those revenues could be used to create a far more competitive tax environment for the entire state.

Although some with vested interests in tax expenditures will likely resist necessary reforms like those we have advocated, it is worth noting that special tax treatment has a very real impact on local communities and businesses. Local jurisdictions, not just the state, should embrace the concept of performance audits and statutory sunsets of their tax expenditures. We often hear about “winning” the battle with Indiana, or Kentucky, or that State Up North for securing the location of a particular company’s new expansion. The city or local community that “wins” that battle stands to benefit most from the new expansion. By limiting tax expenditures and working to make Ohio’s overall tax burden lower, flatter, and fairer, the state becomes more attractive and more business-friendly for companies looking to expand or relocate.

Ohio has shown marked improvement in the race for a lower tax burden. The non-partisan Tax Foundation’s state/local tax burden rankings show that Ohio improved from 7th highest in 2005 to 19th highest in Fiscal Year 2012.[4] The Ohio Department of Taxation reports that in 2012-2013 the state’s tax burden still ranked 33rd as measured per capita, and 32nd measured as a percentage of income.[5] The same analysis finds that Ohio ranks 18th in per capita local tax burden, and 9th as a percentage of income.[6] Ohio should look for ways to continue improving the state’s overall tax burden rankings, not perpetuate tax policies like tax expenditures that create perverse incentives for Ohio’s local jurisdictions and businesses to compete with each other in ways that fail to grow the economic and jobs pie. In the long run, no local community’s economic pie will grow by offering favorable tax incentives to one business but not the other across the street. That’s not economic development, that’s cannibalism.

To conclude, Ohio policymakers should look to further flatten and lower the state’s overall tax burden, and eliminating tax expenditures is yet another means toward that end. Ultimately, some, maybe even most tax expenditures will survive, but they should only remain on the books after an affirmative vote by the General Assembly and a true performance audit that provides a complete picture of all tax expenditures—the carryout food exemption included.

I have attached to my testimony a list of the tax expenditures that should receive greater scrutiny—whether through an audit process or during the next biennial budget process—and I would be happy to answer any questions that the Commission might have at this time.

1. Joe Testa, “Tax Expenditure Report for Fiscal Years 2016-2017,” Ohio Department of Taxation, January 27, 2015, http://obm.ohio.gov/Budget/operating/doc/fy-16- 17/State_of_Ohio_Budget_Tax_Expenditure_Report_FY-16-17.pdf

2. Joint Committee on Taxation, “Publications on Tax Expenditures,” U.S. Congress, accessed on February 17, 2016, https://www.jct.gov/publications.html?func=select&id=5

3. Joe Testa, “Tax Expenditure Report for Fiscal Years 2016-2017,” Ohio Department of Taxation, January 27, 2015, http://obm.ohio.gov/Budget/operating/doc/fy-16- 17/State_of_Ohio_Budget_Tax_Expenditure_Report_FY-16-17.pdf

4. Tax Foundation, “Annual State-Local Tax Burden Ranking FY12,” Tax Foundation, January 20, 2016, http://taxfoundation.org/article/state-local-tax-burden-rankings-fy-2012

5. Ohio Department of Taxation, “State and Local Tax Comparisons, 2012-2013,” December 17, 2015, http://www.tax.ohio.gov/Portals/0/tax_analysis/tax_data_series/state_and_local_tax_comparison/tc12/TC12CY 13.pdf

6. Ibid.