Statehouse tax cuts hurt cities, schools
Two myths imprison Statehouse Republicans, who run just about everything worth running on Capitol Square — statewide executive offices, the General Assembly and state Supreme Court.
Democrats also have myths, such as the conviction that school funding is a bigger problem than bad parenting. But as to the GOP, Myth One is that tax cuts promote growth.
Myth Two is that the state has no necessary responsibility to aid local governments with state tax money.
Sure as sunrise, hopeful Republicans will outdo each other bragging about, or promising to outdo, GOP tax cuts that began in 2005, when Bob Taft was governor, Jon Husted (now secretary of state, and a candidate to succeed Gov. John Kasich) was House speaker, and Ashland’s Bill Harris was Senate president.
In 2005, the legislature cut Ohio’s income tax by 21 percent over five years and created the Commercial Activity Tax, a tax on a business’s gross receipts. CAT replaced Ohio’s corporate franchise tax and the property tax on business equipment and inventories. (The tax on equipment and inventories helped fund local governments and schools, not state government.) In 2004, the tax on business equipment and inventories produced $1.65 billion statewide, according to Taxation Department data; about 70 percent went to school districts. Also in 2004, the corporate franchise tax produced about $870 million for state government.
Repealing the tax on business equipment and inventories was a longsought goal of business lobbies. The CAT tax wasn’t a universally popular replacement, but legislators passed it and Taft signed it. Supposedly, the CAT tax would flood Ohio with milk and honey by unleashing all the enterprise and ingenuity the pre-2005 taxes had squelched.
But a Tax Foundation report, by senior policy analyst Jared Walczak, says that since the 2005 tax package passed, “Ohio’s economic growth has lagged that of the nation as a whole and trailed all of its regional competitors except Michigan.” Moreover, according to Ohio Development Services Agency data, Ohio’s poverty rate, which was 13 percent in 2005-06, grew to 14.8 percent by 2014-15 (when the national rate was 14.7 percent).
In 2004, the corporate-franchise and business-property taxes combined produced $2.5 billion in revenue. In 2016, their “replacement,” the CAT tax, produced $1.69 billion in revenue. Arguably, that is, what had been the state’s rake-off (pre-2005 corporate franchise tax receipts) in effect doubled, benefiting the state treasury (money legislators can spend). But the pre-2005 tax on business property, which benefited schools and localities, not the state, went bye-bye.
Yes, there’s been some state reimbursement to schools and localities for lost revenue. (And Kasich stretched out the reimbursement period for government units that’d had a greater reliance on the businessproperty tax, a Budget Office spokesman noted.) Still, there’s often Statehouse grousing about state aid to local governments, i.e., GOP Myth Two: Because federal revenue sharing ended in 1986, Ohio should stop sharing state revenues with Ohio’s localities.
True, state money might seem like free money to some cities. If you doubt it, attend your city’s council meetings and see whose brainstorms you’re paying for. But sharing state revenue has a long history. Amid the Depression, the General Assembly, creating the sales tax in 1934, said its aims included “affording revenues, in addition to … property taxes … for the support of local governmental activities.” That’s the history, unwelcome though it may be to those legislators who scorn another historical reality — municipal home rule — when home rule gets in the way of a lobby (example: frackers). But the same legislators love “your-town-wants, yourtown-pays” home rule: That leaves money on the table — at the Statehouse.