Ohio needs to simplify convoluted tax systemJun 18, 2017
This op-ed appeared in The Columbus Dispatch.
Winston Churchill once wrote, “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
There is great wisdom in Sir Winston’s statement. Fortunately, Ohio policymakers have largely embraced this wisdom over the last decade with state tax reforms that have positively impacted Ohio’s economy. However, much more is needed to keep Ohio moving forward, including broader reforms to Ohio’s local tax structure.
To help policymakers and everyday Ohioans better understand Ohio’s taxes, The Buckeye Institute recently joined with the Tax Foundation to publish a visual guide to Ohio’s taxes and economy, “Ohio Illustrated.” The book highlights areas where policymakers have made improvements to Ohio’s job and economic climate and areas where work remains.
One area where Ohio has seen improvement is reducing the state personal income tax, a policy that is critical for long-term economic growth and one that is paying off. Data from the Bureau of Economic Analysis shows that Ohio’s economy grew faster in 2016 than its neighboring states, second only to Michigan, proof that these policies are having a positive impact.
Unfortunately, while the state has been moving in the right direction, local taxes continue to be a particular thorn in Ohio’s side.
Ohio hosts the absolute worst municipal income tax in the entire nation. Only 17 states levy local income taxes and of those, Ohio has second-highest effective rate, which is layered onto the state income tax.
If you happen to live in one of the more than 200 jurisdictions that don’t offer a full credit for the taxes paid where you work and a school district with an income tax, your combined state and local income tax rate could easily be more than 9 percent. That is close to what residents of high-tax states like New York and New Jersey pay.
This means less money in the pockets of many Ohio families. For example, if someone works in Columbus and lives in Powell, they will pay 3 percent of their income in local taxes on top of their state rate. This is because Powell only offers a .25 percent credit on their .75 percent rate. This is then added to Columbus’ 2.5 percent rate. Take the same situation for a Westerville resident and he or she will pay only 2.5 percent to Columbus since Westerville offers a full credit to their residents on taxes paid to where they work.
Confusing, isn’t it? In essence, the first resident is unfairly double taxed, while the second is not. Even worse, both of those taxpayers had no vote on the rate they pay to Columbus since they don’t live there. I seem to recall a special party in Boston over the issue of taxation without representation.
Even worse, the complexity of filing in multiple jurisdictions means hours of effort to do nothing more than merely comply with local tax. It is common for contractors that work in numerous different cities to have to file 20, 30, or even 40 different tax returns. No other state has localities that make their taxpayers run through this kind of obstacle course and this should change.
Recognizing this burden, the Kasich administration and the General Assembly are close to implementing a positive reform that will ease some of this hardship for Ohio’s small businesses. A provision in the current version of the state budget will allow businesses to file a single return through the state and cut through much of the complexity. This is a positive step, albeit a small one.
While keeping state and local taxes low and broad-based is key to ensuring Ohio’s continued economic growth, it is important that lawmakers avoid favoring any specific groups of businesses over others through an ever-expanding list of tax credits and deductions. Ohio’s priority should be to create more jobs and grow the economy and this means making our overall tax system simpler and fairer for all Ohioans. We should continue to embrace Sir Winston’s wisdom and make sure that we don’t become like the man standing in a bucket who tries to lift himself up by the handle.
Greg R. Lawson is the research fellow at The Buckeye Institute.