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Half a billion below Expectations: Ohio’s Tax Collections Shouldn’t Surprise Anyone

by Orphe Divounguy, Ph.D. Feb 13, 2017

The author is an Economist at the Buckeye Institute. The views presented here are the views of the author. They may or may not reflect the views of the Buckeye Institute. The author can be contacted for comments at orphe@buckeyeinstitute.org.

In 2016, Ohio’s tax collections were 2.5% short of the $20.2 billion expected tax revenues, and these numbers really shouldn’t surprise anyone.

Ohio’s Department of Job and Family Services’ January employment news release revealed that monthly job growth had slowed in 2016, a slowdown more pronounced in Ohio when compared to its neighbors and the rest of the US economy. Private sector employment only grew 0.82% in 2016, down from 1.95% in 2015. Even though lower growth was expected, Ohio’s employment growth fell way short of expectations.

So how correlated are changes in employment to the state’s income and sales tax collections? It turns out that employment and private nonresidential investment are highly correlated with income and sales tax revenues. Whether causal or not, a correlation coefficient equal to 1 represents a perfect one to one relationship between two variables. For example, the coefficient for the correlation between tax revenues and GDP per capita is 0.929, as shown in the table[1] below. Therefore, GDP and tax revenues exhibit a strong positive relationship.

The Governor’s 2018-2019 budget proposes to reduce the number of tax brackets and to increase income tax exemptions. The Governor’s budget also confirmed his commitment to a shift from income taxation toward consumption based taxes. Governor Kasich understands that a highly progressive state income tax penalizes workers and their employers.

Although the Governor’s proposed tax shifts can yield small increases in productive activity, the Governor should turn his focus to removing entry barriers that keep many Ohioans out of work. Restrictions on occupational licensing are an example.

Ohioans still spend between 85 and 228 more days trying to obtain a license than those in the similar occupations who reside in Michigan, Indiana, Pennsylvania, and West Virginia. In Forbidden to Succeed, The Buckeye Institute makes the case that while it is reasonable to require extensive training for jobs that pose significant health and safety concerns, such as physicians and airplane pilots, the same is not true of auctioneers, cosmetologists, and barbers. These requirements are significant barriers to employment and investment.

The Governor’s efforts are steps in the right direction. However, most economists agree that broadening the tax base by removing participation hurdles will do much more to raise tax revenues.

 


[1] The data used to construct correlation coefficients was collected from the Bureau of Economic Analysis (BEA).