Dear Members of the Ohio Senate:
On behalf of the members of National Taxpayers Union (NTU) in Ohio, I submit the following comments on the Ohio Senate’s two-year budget plan, which was unveiled last week and is tentatively scheduled for a vote this week. If enacted in its current form, the budget would appropriate nearly $71.3 billion over the next two years, while slashing taxes by $1.7 billion over the same span. Though the document as a whole is a decidedly mixed bag, there are certainly provisions worthy of support.
On the positive side, the budget proposes a 6.3 percent income tax cut, which would total $1.26 billion in net tax relief to Buckeye State residents over the next two years. Likewise, the Senate’s budget would provide a deduction on the first $250,000 of net income for business-owners. Finally, the budget would establish a flat three-percent flat tax on small business income above $250,000. These are all good proposals – worthy of taxpayer support.
At the same time, however, the Senate plan hikes cigarette taxes by 40 cents per pack, while boosting the tax on cigars, chewing tobacco and other tobacco products by 5.5 percent. In total, it is estimated that these policies will raise $406 million over two years. There are a number of problems with tobacco tax increases, which NTU has previously documented.
For starters, tobacco taxes are regressive in nature, disproportionately affecting lower-income earners. Next, sales of tobacco products are integral to the success of certain small businesses – accounting for approximately one-third of all sales at convenience stores, according to the National Association of Convenience Stores.
Increased taxes on tobacco products also create further incentives for smuggling or cross-border sales of tobacco products. According to a 2015 Mackinac Center for Public Policy study, 7.1 percent of cigarettes consumed in Ohio in 2013 were smuggled in from out of state. The Senate’s budget would exacerbate the problem.
Last, cigarette and tobacco taxes rarely yield the amount of revenue proponents initially project. A 2013 study by NTU’s research arm, the National Taxpayers Union Foundation, found that actual revenue generated by increased cigarette taxes fell short of initial projections nearly 70 percent of the time based on data collected between 2001 and 2011. For these reasons, NTU urges Senators to remove the tobacco tax increases from thebudget.
In addition, the Senate plan applies Ohio’s sales tax and local piggyback taxes to the retail price paid for a hotel room sold through Internet companies like Kayak, Expedia, Travelocity, and Priceline. There are numerous problems with this approach. These hotel intermediaries do not own hotels; they are merely the conduit between consumers and hoteliers. Next, the convoluted scheme makes collection efforts a nightmare. What happens if a person books through an online website then cancels the reservation directly through the hotel? Finally, Ohio’s neighbors have avoided taxing hotel intermediaries; by levying the tax, Ohio would incentivize tourists to visit Indiana, Michigan, or Pennsylvania instead.
The Senate budget also contains a provision that allows Erie County to hike its lodging tax by one percent to partially subsidize a sports park. Proponents of the facility argue it will create jobs. The record for government support for sports complexes is deplorable. Such ventures routinely lose money and almost never live up to the hype surrounding them. If developers and proponents believe a sports complex in the area could thrive, only private capital should be used to fund the project; no taxpayer resources should be expended. Finally, by raising the price paid by tourists for hotels, the tax hike would have a detrimental impact on the local economy.
Also noteworthy is the Senate’s restoration of a $50 a year ($100 for married filers) tax credit for contributions to candidates for political offices. Only donations to certain offices qualify for the tax credit. Four states – Arkansas, Ohio, Oregon, and Virginia – have some form of preferential tax treatment for political campaign contributions, though the details differ for each. This is bad fiscal policy. In Oregon in 2010, it was estimated that nearly 60 percent of filers claiming the campaign contribution credit made over $77,000 per year. In other words, similar credits benefited primarily wealthier taxpayers. Furthermore, studies have confirmed that few people in Ohio take advantage of the credit, which makes the cost of complicating the Ohio tax code outweigh any marginal increases in political participation. Instead of narrowly-drafted provisions such as these, taxpayers would be better served by further reductions in marginal income tax rates.
As is often the case in public budgeting, the Senate’s plan has both good and bad elements. NTU urges the Ohio Senate to adopt the proposed tax cuts, while avoiding budget gimmicks, tax hikes, and unproductive fiscal policies.
Policy and Government Affairs Manager