By Greg Lawson & Scott Drenkard
In the competition among states to implement pro-growth tax reforms, North Carolina and Ohio illustrate the contrast between the bold and the timid.
A recent overhaul of North Carolina’s tax code is expected to move the Tar Heel State from 44th to 17th place in the Tax Foundation’s State Business Tax Climate Index, catapulting it ahead of all its neighbors save Tennessee. This is the largest rank improvement in the ten-year history of the
Index and should lead to more job creation, capital formation, and higher wages for North Carolinians in the years ahead.
By contrast, Ohio made more modest tax reforms in its recently passed biennial budget. While Ohio’s $2.7 billion income tax cut is laudable, Ohio’s top income tax rate is still higher than three of its immediate neighbors, and its sales tax rate, when combined with local sales taxes, is higher than any of its contiguous neighbors. Things only get worse when factoring in the most complicated, absurd, and punitive system of municipal taxation in the nation.
Ohio has over 600 municipalities that levy income taxes, affecting over 9 million residents. Revenues exceed $4.5 billion a year, providing half of all municipal revenues.
Ohio, unlike any other state, grants each municipality broad autonomy to determine what is in its income tax base. The local ordinances defining these hundreds of distinct income tax systems exceed a staggering 16,000 pages. This complexity creates an extraordinary compliance burden, as employers, especially contractors of varying stripes, must track their employees’ location by hour, by jurisdiction to properly comply with the differing tax codes of all the localities in which they conduct business. A northeast Ohio electrical contractor once filed 221 W-2s for 19 employees, along with 39 business returns, most having a tax due of $5 or less.
Even worse, taxpayers who live in one community and work in another may owe income tax to both localities. They frequently pay taxes on the same dollar more than once because some localities refuse to offer a credit for tax paid to the other.
There are no caps on municipal tax rates, and with some cities also levying school income taxes, combined state and local income tax rates can skyrocket to 9 percent or more.
Businesses also suffer under unpredictable actions by local officials. For instance, after a major business booked a large loss during the Great Recession, one Ohio city hastily revoked a provision allowing losses to be claimed on future tax returns in order to wring more tax revenue from the company as soon as it returned to profitability.
The widespread support for overhauling this broken system is evidenced by the formation of the Municipal Tax Reform Coalition of 30 Ohio organizations that represent tens of thousands of enterprises and hundreds of thousands of employees. Despite this formidable coalition, attention to this serious issue has been scant.
Long overdue legislation is pending before Ohio’s General Assembly that would set uniform standards for municipal taxes across Ohio. The proposed bill would not completely resolve Ohio’s municipal income tax morass, but it would begin to give taxpayers much-needed predictability. Yet this reasonable step forward has been hung up in committee since January, as swarms of local officials descended on Columbus to lobby for continuation of the status quo.
But the status quo won’t do. Between 2000 and 2010, Ohio lost more private sector jobs than any other state except Michigan. The Buckeye State can do better and provide fundamental tax reform, or it can watch its neighbors pass it by.
Mr. Lawson is a policy analyst with The Buckeye Institute for Public Policy Solutions. Mr. Drenkard is an economist with the Tax Foundation.