Tax group says Ohio is one of the least business-friendly states

By Jason Hart | Ohio Watchdog

Ohio came in 44th in a new Tax Foundation state business climate index, dropping two spots from last year and ranking in the bottom 10 for the fourth year in a row.

Ohio ranked lower than any of its neighbors in the report released by the nonpartisan Washington, D.C., nonprofit Tuesday. Indiana ranked 8th, and Michigan ranked 13th.

“The states in the bottom ten suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates,” Tax Foundation’s Scott Drenkard and Joseph Henchman explained in a release announcing the 2015 index.

Ohio’s tax climate has hampered employment in the state, which remains 300,000 jobs shy of a 4.85 million March 2000 high. Based on a U.S. Congress Joint Economic Committee analysis, Ohio has seen net job losses of 2.1 percent since the start of the 2007 recession while the nation has seen net job gains of 0.8 percent.

In a phone interview with Ohio Watchdog, Drenkard said Ohio’s lower ranking in the 2015 State Business Tax Climate Index resulted from Gov. John Kasich’s failure to keep up with reformers elsewhere.

“North Carolina, for example, came out of the 44th position and jumped up to 16th because of the huge individual, corporate and sales tax reforms that we’ve seen there in the last two years,” Drenkard said. “Ohio, by contrast, has sort of stood still in the past couple years.”

“Gov. Kasich has been going forward with proposals for income tax cuts,” Drenkard continued. “While cutting the personal income tax is great and welcome and can contribute to economic growth, the reforms haven’t really been met with the sort of base-broadening we’d like to see.”

“A lot of the proposals coming out of the Kasich administration have been to bring the rate down on the individual income tax and pay for it with other non-transparent tax increases.”

Tax Foundation supported the Republican governor’s expansion of the state sales tax to formerly-exempted services, but has long been critical of Kasich’s other tax proposals — such as paying for income tax cuts with hikes in the Commercial Activities Tax, cigarette taxes and severance taxes on oil and gas drilling.

“So few states even levy gross receipts taxes like the CAT anymore that Ohio is kind of an anomaly,” Drenkard told Ohio Watchdog. “Gross receipts taxes are the worst that tax policy has to offer; Ohio has one of those, and it was suggested that that rate should be increased, and that’s just really, really poor tax policy.”

Free-market think tank Opportunity Ohio released a series of videos highlighting Ohioans who would be affected as an unintended consequence of a severance tax hike.

“You can’t really call any of the things that have been proposed in the last couple of years ‘tax reform,’ per se, as it would be more appropriate to call them ‘tax shuffling.’ There’s no real central theme with the proposals that have come out, and the index score kind of shows it,” Drenkard added.

Drenkard said although the annual Tax Foundation index accounts for local income taxes, it does so only by comparing rates in each state’s largest cities.

“Ohio’s big problems with the municipal income tax are not fully captured by our methodology, because they’re administrative and compliance problems, primarily,” Drenkard explained. He has previously called Ohio’s local income tax system “the most complex and unnecessarily burdensome” in the entire country.

Drenkard also described Gov. Kasich’s JobsOhio, which uses state liquor tax revenue to fund tax incentives for specific businesses, as part of the problem.

“Oftentimes you’ll see that it’s good for the businesses that get the credits, but that comes at the expense of having a code that plays favorites and having a rate that has to be higher to collect the same amount of revenue. If you start carving away at the base, you’re going to have to raise the rate if you want to collect the same amount of revenue — and over time, that’s what happens.”

“That’s why tax reform becomes necessary,” Drenkardsaid. “The way to fix it is to go through the politically difficult process of getting rid of those exclusions and privileges in the code and bringing the rate down overall, and that has not happened in Ohio in some time.”