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From Governing’s
It looks like the cycle will maintain itself in the first decade of the new century. Even though the state’s tax system is decently structured — with a balance between state income and sales taxes and the local property tax — the treasury appears to be about $4 billion short for the next biennium. Ohio will likely spend down its entire $1 billion rainy day fund by the end of the fiscal year and has resorted to a host of gimmicks (including delayed Medicaid payments) to meet its obligations. With almost 90 percent of the general fund going to education, prisons, health care and property tax relief, there aren’t many ways to close the gap aside from tax increases. What’s more, state leaders are confronting continued issues with school funding. In December, the state Supreme Court declared that the state still does not have an adequate plan to provide equity in its schools. How this will play out is uncertain, but the state could face a multibillion-dollar bill for its schools over the next couple of years.
Unlike many states facing equally painful choices, Ohio really has more of a spending problem than a tax problem. It didn’t enact any substantial permanent tax cuts during recent boom years, using one-time income tax rebates to dispose of surplus cash, as state law mandates. The biggest problem on the revenue side has to do with estimation. The specialists in the Revenue Department haven’t been very good at it. In the past few years, they have consistently predicted more tax receipts than have actually come in, and the legislature has spent the estimates. The errors stem largely from the fact that Ohio’s income tax has more graduated steps than that of almost any other state. In times of recession, taxpayers fall into lower brackets, and the result is a shortfall in the treasury. The forecasts “have proven to be wildly optimistic,” says Richard Levin, a tax and budget research analyst with Levin, Driscoll & Fleeter. “We haven’t collected the revenues that the budget was built on.” The state currently has a high-level committee considering ways to raise taxes or change the structure. Among the items on the table, inevitably, will be compensating for the declining proceeds of the state’s corporate taxes and broadening the sales tax base — although Ohio already taxes a few more services than many states. Employment services and lawn care are among the categories covered in the existing code. Any work the commission does will encounter a major obstacle. Ohio has more than 1,100 cities, counties, villages and school districts that can raise their own income and sales taxes. So even though Ohio’s burden at the state level is low relative to competing Midwestern states, the plethora of local levies changes the situation. For example, Ohio’s state sales tax is 5 percent, lower than the 6 percent charged in Michigan, Indiana and Pennsylvania. But localities in Ohio can tack on as much as 2 percent more. This means that the maximum sales tax in Ohio is actually 7 percent, the same as Pennsylvania’s, and more than Michigan’s and Indiana’s 6 percent. Efforts to go any higher at the state level will run into complaints that Ohio risks putting some of its businesses in an uncompetitive position. The decentralized tax structure also increases compliance costs. Anybody doing business in multiple jurisdictions has to comply with a variety of rates and reporting procedures. “There are hundreds of communities in Ohio with an income tax,” notes David Ellis, of the Federation for Community Planning. “There’s the potential, depending on where you live or work, of filling out four or five tax forms.” The state government has the authority to regulate local tax structures, but any kind of major reform would be very difficult politically. Ohio’s Department of Taxation has long stood out from the pack in the quality of its management, particularly when it comes to fairness in dealing with taxpayers. The department’s policy has been to negotiate with them in good faith rather than harass them when it’s clear they can’t pay a bill. It allows 60 days for an appeal, instead of the usual 30 days, so they can be better prepared. And Ohio has been a national leader in electronic filing, second only to California in the number of paperless returns it receives, according to the Department of Taxation. There is a brand-new Web-based income tax reporting system. Unfortunately, budget cuts have hurt the department in a number of ways. For the past few years, a steady flow of employees has left, and while restaffing is now taking place, lower overall funding has forced the closing of satellite offices and elimination of extended service hours during tax season. In addition, the state doesn’t have adequate technology to effectively match its various databases in order to catch tax avoiders. Why hasn’t the legislature provided more money for such activities? “They politicize,” says Tax Commissioner Thomas M. Zaino, “by being for the common man and against the tax guy.” Note: The Indiana sales tax rate cited in the seventh paragraph above has been corrected from the figure that appears in the print magazine. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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very 10 years or so, Ohioans get hit with a tax increase. Back in 1972, Ohio followed well-established practice and enacted an income tax. A decade later, the legislature passed a series of rate increases and temporary surcharges. And in the early 1990s, the sales tax base was broadened.