Gov. Kasich's two-year budget will save Ohio taxpayers $2.7 billion. But experts disagree about the impact the cuts will have on economic development.

Gov. Kasich's two-year budget will save Ohio taxpayers $2.7 billion. But experts disagree about the impact the cuts will have on economic development.

To Joe Popp, it's pretty simple. "We have more choice, less tax, and less tax on Ohio businesses that we want to incentivize-what's not to like?"

To Zach Schiller, it's pretty simplistic. "Taxes are not as big a factor as they are often described to be," he said. "We've not seen tax increases have either some disastrous effect or tax cuts have a remarkably positive one."

Popp, a lawyer and tax adviser with Rea & Associates in Dublin, and Schiller, research director of nonprofit Policy Matters Ohio in Cleveland, are both talking about sweeping tax changes in the $62 billion two-year state budget that took effect July 1. Republican Gov. John Kasich and the GOP-dominated legislature approved a package they say will save Ohio taxpayers $2.7 billion over the next three years-the net of a $5.3 billion state income tax cut and a $2.6 billion increase in other taxes. In all, a projected 98 percent of Ohio taxpayers will pay less in state taxes.

"Look, $2.7 billion means that's a lot more dollars that flow into our economy," Kasich said during an event at the Westerville Grill-a small diner on the main drag of Kasich's adopted hometown where he sometimes eats breakfast-just before the tax cuts took effect. "You take that with the billion-dollar cash rebate from workers' comp, it's pretty stunning. Government never gave you any money back."

The budget package includes a 50-percent state income tax deduction on up to $250,000 in net business income and an across-the-board state income tax cut growing to 10 percent by 2015. Kasich said as far as his staff can tell, it's the biggest tax cut in the nation this year.

"The issue is economic growth. I believe the less you tax work, the less you tax investment, the less you tax risk-taking, the more you will get of all those very desirable things. And when people risk-take, and when we invest in work, when we invest in empowering individuals, it means you have greater economic growth," he said. "This why I say that growing jobs is the greatest moral purpose that we have. It's because when mom and dad work, marriages are better, kids do better."


Tax Commissioner Joe Testa, who was at the Westerville tax-cut rollout, gushed, "This is really a big day for Ohio taxpayers... This helps people to be able to invest, grow and create jobs."

He noted the new tax reductions join the elimination of Ohio's estate tax, which took effect at the beginning of 2013. "By continuing to lower taxes, we believe that we can help Ohio grow and create jobs," Testa said.

In a nutshell, that is the Kasich administration's driving philosophy. And it is a major point of contention with critics of the tax changes.

This fall, Testa provided legislators with 123 pages from a handful of studies connecting lower taxes with job creation or retention. "Not all taxes are created equally, and leading economists have long stated that income taxes inhibit economic growth," he told an Ohio House committee studying tax reform.

But Schiller told the same committee: "For years, North Dakota has had the lowest unemployment rate of any state in the nation. Nevada, by contrast, has had the highest. North Dakota has a personal income tax, while Nevada has no personal income tax. There are, of course, other states that show a different pattern. We cite this to illustrate that taxes, and the personal income tax in particular, are not the factor that determines state economic success."

He said some of the studies cited by Testa have been refuted, while others contradict reports from the same group. Correlation does not equal causation, he added.

Recent Ohio history also refutes the tax-cuts-lead-to-jobs argument, he said.

After the legislature and Gov. George V. Voinovich raised the top rate of the state income tax to 7.5 percent in 1992, Ohio produced more than 100,000 jobs in each of the following three years. But after lawmakers and Gov. Bob Taft launched a phased-in reduction of the income tax by 21 percent beginning in 2005, "Ohio underperformed the nation," Schiller said. "Since June 2005, we have lost a greater share of our jobs than all but three other states."

Republicans often defend that 21-percent tax reduction, which took full effect in 2011, by saying Ohio would have been even worse off during the recession without it. Schiller says such assertions are impossible to prove, although he is not saying lower taxes don't play a role in job creation.

"I just think this focus on low taxes as the be-all and end-all of economic development is simply misplaced," he said.

In October, the semi-annual PNC Economic Outlook survey showed that despite the new state tax cuts, only 17 percent of Ohio's small and mid-sized business owners intend to add full-time employees, while 7 percent plan to reduce full-time staff and the remaining 73 percent will make no changes during the next six months-only a tiny improvement from a year earlier.

Popp, who also was at the tax-cut kickoff, called the new tax setup-including the sales tax hike-a welcome change.

"This is giving taxpayers more voluntary choice: The more items that you buy that are subject to the sales tax, the more tax you pay," he said. "Choice is a really important item for a lot of small business owners."

The sales tax is more regressive, meaning it affects lower- and middle-income people more than those with higher incomes. Republicans note that Ohio's sales tax exemptions on such necessities as food, housing and prescription drugs soften the impact.

Popp acknowledged that the tax overhaul could hurt poorer Ohioans, such as those on food stamps or receiving subsidized housing.

"The people who pay more are on the lower income side where a greater percentage of their income is spent on things subject to sales tax," he said.

While those with higher incomes will see the biggest tax decrease in terms of dollars, that also is the group most likely to fuel the Ohio economy, Popp said.

"What you can't see is that higher-income person is more likely to buy a boat than the lower income person, more likely to buy a car every two or three years. They're putting lot more into the system than normal income tax."

Popp said it's all part of an ongoing fundamental structural change in Ohio's tax system.

The state has moved to the commercial activities tax, which taxes sales, from the franchise tax, which essentially taxed net income, he said. It is dialing back the income tax in favor of a small increase and slightly broader base for the sales tax.

"When you're looking at everything together...this set of changes is moving us more toward a consumption-based tax rather than an income-based tax," Popp said. "We're moving to tax slightly different things. That's just the design of the system."


Legislative Democrats did not support the tax package, saying it overpromises on jobs and gives the lion's share of the benefits to upper-income taxpayers, shifting more of the burden to those in lower brackets.

A two-income family with one dependent making about $76,000 a year, for example, would save about $2 a week-$105 a year-from the income-tax cut, state tax department calculations show. A single person making a little more than $38,000 would see their paycheck grow by less than $1 a week, or $49 a year.

Because of the nature of a progressive income tax like Ohio's, those in the lowest brackets get a larger percentage benefit from a flat, across-the-board reduction. Once the reduction is fully phased in, the income tax cut for those making up to $43,800 a year will be greater than 11 percent, while it's barely more than 10 percent for the top wage earners.

However, those in the highest two tax brackets-making at least $109,600 annually-will reap a collective $660 million, since they also pay the largest share of income taxes. That compares to a combined $483 million for Ohioans in the lowest seven tax brackets.

Critics also question why high-income earners are getting large tax cuts when state funding for the local government fund has been slashed and school funding is still almost $300 million below 2009 levels. Potential employers look at the quality of local services, especially schools, when deciding where to relocate, several Democrats point out.

Janet Tressler-Davis, president and CEO of the Westerville Area Chamber of Commerce for 20 years, said that local governments, like businesses in a down year, have to cut back when money is scarce.

"I just think that we are in an economy where everybody is going to have to tighten their belt," said Tressler-Davis. "You need to continue to evaluate how you spend, where you're spending it."

One of her counterparts at the state level, Dan Navin, assistant vice president for tax and economic policy at the Ohio Chamber of Commerce, said municipalities in the Buckeye State are together pulling in roughly as much tax revenue as state government does. And a huge percent of the state budget serves merely as a pass-through to local governmental units, he said.

"That's a ton of money that's being provided by the state, and yet too many of these local government entities choose to complain about the level of support from the state," Navin said.


Even more hotly contested is the debate over the economic value of the 50-percent tax deduction for many small businesses, which will total $1.6 billion over three years. Kasich administration officials say that small business creates more than 64 percent of new private sector jobs.

The maximum savings under the deduction is $7,000 for business owners earning at least $250,000 in net taxable income. State data show that about 90 percent of business income filers will see a cut of less than $1,000 per year. The average Ohio taxpayer with business income earned about $25,000, which will generate a tax cut of $351, the state says.

National figures show that about 80 percent of business owners employ no one but themselves, and most have no plans to grow.

"You're really throwing a huge amount of money at people who really won't use it that way," Schiller said. "The thing is not well thought out at all."

He said Ohio would become more economically competitive if the money were instead spent on something like improving the state's once-proud preschool system, funding infrastructure needs, or reducing college tuition.

"We have these very significant unmet public needs, both in terms of human services and what businesses need to be competitive, and we're throwing away millions of dollars."

Another factor that's not discussed much is that a portion of some business owners' state tax savings essentially will wind up with the federal government, because they won't have as much state income tax to deduct on their federal income tax form.

Still, Kasich praised his plan by saying, "When they know they get a 50-percent tax cut on the $250,000, it gives them space to do more things: to invest, hire more people, buy more equipment, buy the computer that you really wanted to buy that you couldn't afford."

Tressler-Davis said the tax cut for small businesses looks "on the surface" like it will create jobs as promised. "And if it isn't, I'm hoping they will rectify it quickly," she said.

"Obviously," Navin added, "the point of it is to provide some tax savings that business owners can then leverage. It will stimulate some degree of economic growth... We think it will be noteworthy if not significant."

Popp agreed that the business tax cut "is not a super-lucrative one."

"I think this is a nice incentive," he said. "But are you going to go out and hire a new person with this? It won't give you a whole person."

Instead, businesses could use their break to pay additional costs under the new federal healthcare law-and get a PR boost with their employees at the same time, Popp said.

He said he has run across a potential problem for some of his clients. When only one spouse owns a business and the couple files income tax forms separately instead of jointly, the business owner will get only half of the state tax cut.

"The other spouse's part of the deduction is lost," Popp said. "That seems to be one of the open items that's a sleeper issue."


Kasich does not want to stop cutting taxes in Ohio. A proposal for additional reductions could come as soon as a mid-biennium budget review, expected in the first half of 2014.

"I believe the (top) income tax rate is too high, at 5.3 (percent)," he said. "That's why it's important we continue to do tax reform. Tax reform means you create a tax system that encourages growth."

Kasich said "it would be ideal" to eliminate Ohio's income tax, but pointed out he had tried for a larger cut this year-bankrolled by a controversial sales tax expansion and raising the severance tax on the oil and gas wells fueled by the state's fracking boom-but was shot down by his fellow Republicans in the General Assembly.

The governor said so many Ohioans are moving to Florida not because of weather, but because the Sunshine State doesn't have an income tax.

"We don't want wealth to continue to walk out of Ohio," Kasich said. "That's why this is so important that we are able to continue to lower the income tax. And as it gets lower, it becomes less and less important.

Kasich wants to get Ohio's top marginal income-tax rate under 5 percent (it's 5.92 percent for 2013) to become more competitive with surrounding states. Their top rates for 2013: Indiana, 3.4 percent; Kentucky, 6 percent; Michigan, 4.35 percent; Pennsylvania, 3 percent; West Virginia, 6.5 percent.

Schiller said fewer than 2.5 percent of Ohioans pay the highest tax rate. Unlike states with flat income-tax rates-such as Michigan, Indiana and Pennsylvania-the bulk of Ohio taxpayers are in lower brackets of the graduated system, with effective rates of 4.1 percent or less, even before the new cuts take effect. And although Kentucky's income tax rates are also graduated, its highest rate of 6 percent applies all the way down to income of $75,000; an Ohioan making that much would pay only 4.1 percent.

"Most Ohioans are not paying anything like the top rate," Schiller said.

Testa defended using only the top marginal rate as a comparison, noting the CATO Institute found "the higher the marginal tax rate, the less incentive individuals have to engage in productive activity to earn that marginal (last) dollar."

He pointed out that, unlike many other states, Ohio allows income taxes to be levied by municipalities and school districts, which in some instances means that Ohio's top marginal rate climbs to double digits.

For example, a worker making more than $219,000 who lives in Kenton and commutes 112 miles daily from the Hardin County seat to a job in Columbus would pay the state's top income tax rate (in 2015) of 5.33 percent plus a Columbus city income tax of 2.5 percent, a Kenton city tax of 1.5 percent (with no reciprocity) and a Kenton City School District rate of 1.5 percent-for a total of 10.83 percent. Of course, it is difficult to tell how many, if any, workers fit into these circumstances, Testa conceded.

Navin of the Ohio Chamber of Commerce said lowering the top rate is important to Ohio's future.

"Certainly most business owners are aspiring to get to that level, and we don't want to discourage them from coming here," he said. "I think the governor and legislative leaders are focusing on the right issue, and that is we've got to become more competitive by lowering our marginal personal income tax rates."

Navin cited two other areas still unaddressed by state officials that affect Ohio's economic well-being. One is the glut of local income taxes across the state, most with their own separate procedures and list of what's subject to their tax. He said hopes the state implements a uniform tax base with the same rules for all municipalities.

Navin also wants an update of taxes on employment services, which have evolved from a statute written in the early 1990s to a variety of state rules.

"After all, what you're trying to do is stimulate the creation of jobs, and if the tax is too restrictive and applies to too many circumstances, that might be something that is retarding some degree of economic investment or business investment in a recovering economy."

When asked about Ohio's economic future, Kasich replied, "To me, the prospects for Ohio are really great."

He added that Ohio's tax changes haven't gone unnoticed. "CEO's around the country, they know what's going on," the governor said.

"When we see stability, when we know there's going to be a constant effort to reduce taxes, then employers start to be comfortable, right, they start to say I trust being here. The worst thing you could do is to have uncertainty," Kasich said. "We've got great people and a great state and I'm tellin' ya, we're absolutely on the way back."

Schiller agrees with the "great people" part, but said the tax package unfairly shifts the burden among those people so that the 20 percent of Ohioans with the least income (under $18,000 a year) will pay an average of $12 more, but the top 1 percent (more than $335,000 a year) will receive an average tax cut of more than $6,000.

"We need a tax system that relies on those who can afford to pay, unlike today's tax code," he said.

Popp said the tax changes- combined with existing breaks such as sales tax exemptions for manufacturers plus state and local economic development incentives- are designed to help people by creating more jobs for them.

"The whole idea is to make Ohio more attractive to the business owner," he said. "They're really trying to put in a lot of great incentives for people to locate businesses here."

Darrel Rowland is public affairs editor of the Columbus Dispatch.