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Governor Taft#039;s tax reform plan won#039;t make the fix

Governor Taft has delivered a tax reform proposal that is long on creativity but short on effectiveness. It features income-tax rate cuts that will worsen the state's long-term finances and a patchwork of taxes that shift the burden to middle- and lower-income families. At the same time, the package doesn't generate the revenue we need to invest in the long-term future of our state.

According to a study conducted by the Institute on Taxation and Economic Policy (ITEP), a Washington, D.C. nonprofit research group that has a computer model of the tax system, Taft's income-tax cut plan is good news for wealthier taxpayers.

If you make more than $274,000, then you are part of that 1 percent of Ohioans who on average will get more than $8,000 apiece from it. This small group will receive almost a quarter of the benefit from the income-tax rate cut. On the other hand, the 60 percent of us who make less than $43,000 a year will receive just 14 percent of the total income tax break.

Taft's income tax cuts makes Ohio's tax system less fair because they flatten out the graduated rate structure of Ohio's progressive income tax.

Under the current system, the more you make - up to a point - the higher rate you pay. Income between $20,001 and $40,000 is taxed at 4.457 percent, for instance, while income over $200,000 is taxed at a 7.5 percent rate. Taft's proposed income tax cut flattens out the tax structure and in so doing, makes it more regressive.

Fairness matters. Taft's tax proposal contains a lot more than income tax cuts, and things don't get fairer when you look at other tax changes he is proposing. According to the ITEP study cited here, if your income is between $16,000 and $28,000, on average you'll actually pay about $68 more in taxes each year under Taft's plan when it is fully implemented.

That's because the tax cuts for the wealthy are offset by regressive taxes that disproportionately affect lower- and middle-income families. For example, under Taft's plan the tax on beer and wine in Ohio would double, sales taxes would increase, and $1.40 a month would be added to everyone's electricity bill.

The worst part about the Taft tax plan is this:

It doesn't get the job done. The plan doesn't raise enough money for the investments we need to make Ohio a great place to live and do business, like providing good schools and colleges, and accessible parks and libraries. At the same time, it squeezes local governments' ability to provide essential services such as police and fire protection, while chopping health services to those unable to afford them.

The income-tax proposal alone will cost $2 billion a year when it is fully implemented in 2010, and future legislatures will find themselves in the same place as this one: Struggling to make ends meet.

Taft touts his plan as a boon to economic development. However, one-seventh of the tax cut will leave Ohio, lost to federal taxes because taxpayers who itemize will have lower state income tax to write off on their U.S. returns.

Moreover, there is little evidence that taxes are a major factor in Ohio's economic malaise. California and North Carolina, for example, have among the highest top individual income tax rates in the country, yet Silicon Valley and Research Triangle became two of the world's leading high-technology centers. In Minnesota, whose corporate and maximum income-tax rates rank near the top, income growth led all but five other states between 1990 and 2002.

We need to stick with the evidence, which shows the way to add jobs and grow the economy is by having a skilled, educated workforce.

This takes adequate, long-term revenue sources, not tax cuts that will weaken our educational system.

Business tax reform is needed. We should begin by strengthening our corporate franchise tax, not eliminating it, as Taft proposes. The revenue base of this tax has been devastated by large companies' ability to shift income among their subsidiaries, and by an increasing number of tax credits and other special interest loopholes created by the legislature.

If the General Assembly simply forced multi-division companies to report their income as one unit, as is done in 16 other states, and took out the loopholes, we would generate a more substantial source of revenue that is fair across companies and sectors.

We've seen enough tax gimmicks. What the legislature needs to do is to provide a real fix. And they need to pay better attention to tax fairness for all of us when they do.

Zach Schiller is the Research Director at Policy Matters Ohio, a nonprofit research institute. He has more than two decades of experience researching and writing about the Ohio economy.