Interested Party Testimony on Municipal Tax Reform Before the Ways and Means Committee, Ohio House of RepresentativesMay 08, 2013
By Greg R. Lawson
Thank you Chairman Beck, Ranking Member Letson and members of the Ways and Means Committee for providing me this opportunity to discuss the urgent need to reform Ohio’s local tax system. My name is Greg R. Lawson. I am the Statehouse Liaison at the Buckeye Institute for Public Policy Solutions. The Buckeye Institute is a non-partisan, non-profit, and tax-exempt organization as defined by section 501(c)(3) of the Internal Revenue Code, which was founded in 1994 as an independent research and educational institution—a think tank—to formulate and promote free market public policy solutions for Ohio. To that end, we believe that the key to Ohio’s prosperity is to maintain a low tax, limited regulation environment that is inviting to those wanting to start businesses.
I come today not to discuss the technical details of House Bill 5, but to place the concept of municipal income tax uniformity and reform into a broader context.
Creating a hospitable environment for new businesses is the only way Ohio will ever be able to shake off its “rust belt,” laggard mentality. Of course, this is much tougher now in the 21st Century than it was in our previous industrial heyday. The communications are faster and the competition is much stiffer.
One commonality that most businesspeople and entrepreneurs share is the understanding that high taxes drain private sector resources and reallocate them based on external considerations that impact economic efficiency. Therefore, dealing with the full spectrum of Ohio’s tax burden, at the state and the local levels is essential to our future job growth prospects.
It is important to understand how devastating the decade between 2000 and 2010 was for Ohio. In fact, it has only recently begun to climb out of the hole into which it fell after losing the second most private sector jobs of any state in the country, nearly 620,000. Only our neighbor up north, Michigan, fared worse over the same time span. Despite private sector job growth in 2010-2012, there is far more that needs to be done in order to supercharge our recovery. The key element is to improve our tax climate in order to invite private sector job growth and the resulting economic growth.
Today, there is an appropriately robust and ongoing debate over state tax reform. While this is positive and we continue to believe efforts to cut and eventually eliminate the state income tax should be pursued, it is often forgotten that local taxes may represent an even greater albatross around Ohio’s collective economic neck.
Consider that Ohio’s overall state and local tax burden in the late 1970s was 40th according to the non-partisan Tax Foundation. By 2005, Ohio’s total burden rose to the unenviable position of 7th highest. Though state tax reforms enacted by the General Assembly in the mid-2000s have paid positive dividends; as of 2010, we still rank well in the top half of the burden scale at 20th.
As we dig deeper, we can see that one of the drivers of Ohio’s overall burden lies with local taxation. This is confirmed by an analysis done in 2012 by the Ohio Department of Taxation (ODT). The ODT found that Ohio’s per capita state tax burden ranks 33rd among states and that it ranks 31st as a percentage of personal income. Meanwhile, the local tax burden ranks 22nd and 13th respectively with a per capita local tax of $1,718 or 4.9 percent of personal income.
Though property taxes are obviously a part of the local tax burden, local income taxes in Ohio represent a real problem for economic growth. Only sixteen states levy any kind of local income taxes, and the majority of these local income taxes many include counties while those with municipal income taxes are limited to only a few cities. With 593 taxing municipalities, Ohio falls behind only neighboring Pennsylvania, with 2,492, in the number of municipalities levying these taxes. Yet the rates are not the worst aspect of Ohio’s local tax problem. Rather, it is the fact that Ohio earns the uniquely dubious distinction of not only allowing municipalities to levy both personal and business income taxes, but it is the only state in the nation that allows each entity to draft its own rules for withholding and the calculation of penalties. This leads to a lack of uniformity across jurisdictions with negative, real world consequences.
This committee has heard from multiple witnesses who have explained how this burden has impacted them. I am sure that you have heard about the plumber or the delivery person who must file personal income tax returns in ten different jurisdictions and have likely heard about the trucking companies that are subjected to income taxes for merely driving through a given municipality on the way to a different destination. These examples illustrate how this veritable labyrinth of different rates and rules leads to compliance burdens that often exceed the actual tax owed. This unique situation in Ohio is especially harmful for small businesses unable to afford the legion of accountants and lawyers necessary to assure municipal income tax compliance. As the Tax Foundation makes clear,
Placing such severe burdens on small businesses keeps them from flourishing and leads to a bad business environment with low incentives for both starting businesses and for existing businesses to stay.
This is a prime reason the Tax Foundation ranks Ohio’s business tax climate an underwhelming 39th.
Entrepreneurial start-ups are a major driver in job creation. A 2010 Kaufmann Foundation study relying upon U.S. Census Bureau data concluded that between 1977 and 2005 existing firms had a net loss of jobs per year while first year businesses added an average of 3 million jobs per year.
This fact does not denigrate the contribution of large, existing companies. They, too, play a significant role in the overall economy. However, new small businesses are pivotal to Ohio’s future, which clarifies for us that taxation as well as filing requirements at all levels of government could easily snuff out tomorrow’s Microsoft, Apple, or Google by adding and increasing significant barriers to entry as the companies struggle early in their lifetime for survival, let alone growth. Even if these taxes only drive them out of the state as they emerge or grow, Ohio will still be a net loser. Consequently, making Ohio’s tax system work for them is every bit as important as making it work for larger, established employers.
Few things could better help Ohio signal to the business community that it is serious about competing with our neighbors than to eliminate the miasma of confusion surrounding our municipal income tax system.
Mr. Chairman, I thank you for the opportunity to testify on this issue and welcome the opportunity to respond to any questions.
1. The Tax Foundation, “Ohio State-Local Tax Burden Compared to U.S. Average 1977-2010,” at http://interactive.taxfoundation.org/burdens/burdensdata.php?format=print&state=Ohio&mode=al l_years_one_state&usa=false (May 6, 2013).
3. The Ohio Department of Taxation, “State and Local Tax Comparisons, 2009-2010,” at http://www.tax.ohio.gov/tax_analysis/tax_data_series/state_and_local_tax_comparison/publications_tds_comparison/TC12CY10.aspx (May 6, 2013).
6. The Tax Foundation, “Local Income Tax Rates by Jurisdiction, 2011,” at http://taxfoundation.org/article/local-income-tax-rates-jurisdiction-2011 (May 6, 2013).
7. The Tax Foundation, “Ohio Considers Changes to Complex Municipal Tax Codes,” at http://taxfoundation.org/blog/ohio-considers-changes-complex-municipal-tax-codes (May 6, 2013).
8. The Tax Foundation, “2013 State Business Tax Climate Index,” at http://taxfoundation.org/article/2013-state-business-tax-climate-index (May 6, 2013).
9. Tim Kane, “The Importance of Startups in Job Creation and Job Destruction,” Ewing Marion Kauffman Foundation, accessed at http://www.kauffman.org/uploadedFiles/firm_formation_importance_of_startups.pdf (July, 2010).