Tuesday, July 18, 2006
Proposed Ohio Capital Gains Cut is Inequitable, Harms Services, and Costs Jobs
The House Ways and Means Committee is considering the provisions of House Bill 626, which proposes a new set of income tax cuts to the rates on capital gains. When Policy Matters Ohio and The Center for Community Solutions saw this proposal, we both immediately turned to the Institute on Taxation and Economic Policy (ITEP) to provide an analysis. ITEP is a non-profit, non-partisan research and education organization that works on government taxation and budget policy issues
Over the last several years we have reviewed and evaluated the various tax policy proposals using recognized principles for sound tax policy. The principles require tax proposals allow for sufficient resources to fund government services demanded by Ohioans in a fair, simple, and economically neutral fashion. The system should also be competitive with peer states.
With respect to tax equity, ITEP found that three quarters of the proposed tax cuts in the first three years would go to the wealthiest one percent of Ohioans.
The proposal would be a job loser, rather than simulate Ohio’s economy. According to ITEP’s analysis, the plan would likely cost the state thousands of jobs because a large share of the tax cuts would be diverted out of state, including almost a fifth that would be sent directly to the federal government in higher federal income taxes.
The proposal also has implications for the state budget and the services it supports. Remember, through the state budget we educate our children, protect our citizens through the corrections system, and provide physical and mental health services to our most vulnerable friends and neighbors. For instance, the state’s Medicaid system insures the healthy births of one in every three children born in Ohio.
This proposal seemed to emanate from the apparent healthy conclusion of the last fiscal year. FY 2006 ended with an surplus of revenues based on year over year tax growth of 2.5% and under spending in a number of state programs.
Given the financial difficulties of the last several years, this is indeed good news. However, the status of the state budget isn’t sound enough to justify an additional half a billion in tax cuts for those most able to pay.
Here is a brief list of budget drivers and tax changes that will be cause for concern next spring when the FY08-FY09 budget is written.
By historical standards 2.5% growth is quite modest. For instance, between FY1990 and FY2005, the average annual growth of GRF tax sources was 5%. Further, most economists see output and income growth moderating over the intermediate term.
Second, the tax reform plan passed in HB 66 was front loaded with revenue increases, but in the next budget the impact of the 21% personal income tax cut begins to take hold and the state will have fewer and fewer resources due to the plan. The increased reliance on sales and excise taxes to support the GRF means slower growth year to year.
Third, most of the savings on the spending side of the ledger was one time in nature. Specifically, reduced Medicaid spending was the result of cuts and one-time reforms implemented in FY2006. We would expect the program to return to growth levels closer to historical standards in the next biennium.
Fourth, there will be continued spending demands in the next state budget. For instance, corrections spending was $37 million under budget. At the same time the under spending was reported, the administration identified a need for additional 1,400 beds due to overcrowding.
K-12 education spending came in $121.5 million under budget, even though the financial system is still unconstitutional according the Ohio Supreme Court.
These are just a few examples of the forces that will conspire to make the next state budget process a difficult one. Consequently, cutting an additional half billion dollars in income taxes primarily for the top one percent of Ohio’s most well off over the next three years seems imprudent at this time.
Over the last several years we have reviewed and evaluated the various tax policy proposals using recognized principles for sound tax policy. The principles require tax proposals allow for sufficient resources to fund government services demanded by Ohioans in a fair, simple, and economically neutral fashion. The system should also be competitive with peer states.
With respect to tax equity, ITEP found that three quarters of the proposed tax cuts in the first three years would go to the wealthiest one percent of Ohioans.
The proposal would be a job loser, rather than simulate Ohio’s economy. According to ITEP’s analysis, the plan would likely cost the state thousands of jobs because a large share of the tax cuts would be diverted out of state, including almost a fifth that would be sent directly to the federal government in higher federal income taxes.
The proposal also has implications for the state budget and the services it supports. Remember, through the state budget we educate our children, protect our citizens through the corrections system, and provide physical and mental health services to our most vulnerable friends and neighbors. For instance, the state’s Medicaid system insures the healthy births of one in every three children born in Ohio.
This proposal seemed to emanate from the apparent healthy conclusion of the last fiscal year. FY 2006 ended with an surplus of revenues based on year over year tax growth of 2.5% and under spending in a number of state programs.
Given the financial difficulties of the last several years, this is indeed good news. However, the status of the state budget isn’t sound enough to justify an additional half a billion in tax cuts for those most able to pay.
Here is a brief list of budget drivers and tax changes that will be cause for concern next spring when the FY08-FY09 budget is written.
By historical standards 2.5% growth is quite modest. For instance, between FY1990 and FY2005, the average annual growth of GRF tax sources was 5%. Further, most economists see output and income growth moderating over the intermediate term.
Second, the tax reform plan passed in HB 66 was front loaded with revenue increases, but in the next budget the impact of the 21% personal income tax cut begins to take hold and the state will have fewer and fewer resources due to the plan. The increased reliance on sales and excise taxes to support the GRF means slower growth year to year.
Third, most of the savings on the spending side of the ledger was one time in nature. Specifically, reduced Medicaid spending was the result of cuts and one-time reforms implemented in FY2006. We would expect the program to return to growth levels closer to historical standards in the next biennium.
Fourth, there will be continued spending demands in the next state budget. For instance, corrections spending was $37 million under budget. At the same time the under spending was reported, the administration identified a need for additional 1,400 beds due to overcrowding.
K-12 education spending came in $121.5 million under budget, even though the financial system is still unconstitutional according the Ohio Supreme Court.
These are just a few examples of the forces that will conspire to make the next state budget process a difficult one. Consequently, cutting an additional half billion dollars in income taxes primarily for the top one percent of Ohio’s most well off over the next three years seems imprudent at this time.
