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Higher sales tax means fewer jobs, less investment for Ohio

Summary:

A one-cent increase in the Ohio sales tax would eliminate more than 98,000 jobs and reduce investment spending by $8.7 billion. Increasing the sales tax by a half-cent would be only a little less destructive. Policymakers should restructure the government education system and cut state spending first.

by David G. Tuerck

Last March, the Ohio Supreme Court ruled that funding for poorer school districts must be brought closer to the statewide average. Many state policymakers believe this requires additional education spending of about $1 billion from state rather than local sources.

Ohio lawmakers face a choice: Raise state taxes or cut other state spending. Cutting state spending, or taking away some special tax break, is likely to gore some noisy political ox. On the other hand, raising a broad-based tax, such as the sales tax, spreads the pain around more or less equally, letting everyone's ox bleed just a little.

Reasoning like this may have motivated governor George Voinovich to propose an increase in the Ohio sales tax as a way of meeting the state's new responsibilities. Eschewing cuts in state spending or in business tax "incentives," the governor described a rise in the sales tax as "comprehensive, equitable, good for the children of Ohio and fair to the taxpayers."[1]

But is it? The trouble with such reasoning is that it ignores one of the bedrock principles of economics: Higher taxes entail sacrifices beyond those incurred directly by taxpayers. It would be on thing if a higher sales tax simply compelled every Ohioan to part with just a little more of his money in order to assure every Ohio student a quality education. The economic reality is, however, more complicated.

Higher taxes, especially higher state sales taxes, don't just produce revenue. They kill jobs and reduce spending on business capital  factory equipment, office buildings, delivery trucks and computers.[2]

The Beacon Hill Institute at Suffolk University in Boston has estimated the effects of a sales tax increase on the Ohio economy. A one-cent sales tax increase would eliminate more that 98,000 jobs, reduce payrolls by nearly $3 billion, depress capital spending by $8.7 billion and raise the Ohio unemployment rate from the current 4.4% to 6.1%.[3]

A half -cent increase would be only a little less destructive. The Beacon hill Institute estimates 49,000 jobs would be lost, capital spending would fall by more that $4.4 billion, payroll would fall by $1.5 billion, and the unemployment rate would increase to 5.2%.[4]

The reason for these ill-effects is threefold: First, a higher sales tax means that a greater part of the consumer's dollar goes to the government rather than back into the economy where it can be used to create jobs and finance capital spending. Second, it means that the state becomes a more expensive place to live, making it more difficult to attract workers to take Ohio jobs. And, third, it means that Ohioans are more inclined to cross the state line to, say, Kentucky to buy big-ticket items. This is particularly important for border cities such as Cincinnati and Toledo.

These economic effects are measurable and important. The worker who can't find a job, the computer firm that finds it difficult to attract qualified workers, the retailer who loses business to a neighboring state as a result of a higher sales tax all deserve consideration, too, in deciding who should pay the fiscal piper.

The sacrifice might be worth making if the end result were better education. Across-the-board increases in school spending, however, are unlikely to impact student achievement. dozens of studies spanning three decades have shown this for the nation as well as Ohio.[5]

Traditionally, it has been the job of local governments to provide education. Now, spurred on by State Supreme court decisions such as DeRolph v. State, states are taking on more responsibility for school funding despite mounting evidence that centralizing school finance does not improve student performance.[6]

If increased education spending is a priority for the state's future, then it is worth noting that the future depends as much on a strong economy as it does on good schools. State lawmakers should take a sharp pencil to other budget items and restructure the current education system before turning to higher taxes as a way of funding it.

David Tuerck, Ph.D., is executive director of the Beacon Hill Institute at Suffolk University in Boston and an adjunct scholar for The Buckeye Institute for Public Policy Solutions, a Dayton-based nonprofit, nonpartisan research and education organization of Ohio professors and scholars. Dr. Tuerck is also the chairman of the Department of Economics at Suffolk University. Versions of this article have appeared in Business First (Columbus, OH) and Business News (Dayton, OH)



Notes

[1]George V. Voinovich, "Hard Decision Lies Ahead on School Funding," Columbus Dispatch September 14, 1997

[2]See Zslot Bacsi, "Do State and Local Taxes Affect Relative State Growth?" Federal Reserve Bank of Atlanta Economic Review 81 (March/April 1996), pp. 18-36; Stephen Moore and Dean Stansel, "Tax Cuts and Balanced Budgets: Lessons from the States," Policy Analysis (Washington, D.C.: Cato Institute, 1996); Richard K. Vedder, "State and Local Taxation and Economic Growth," Staff Report (Washington, D.C.: Joint Economic Committee, Congress of the United States, December, 1995). Standard public finance texts confirm that income and sales taxes have roughly the same effect, equally diminishing the fraction of a firms' gross revenue that is available to hire capital and labor inputs. See Richard A. Musgrave, The Theory of Public Finance (New York: McGraw-Hill Book Company, Inc., 1959) pp. 350-3.

[3]The Economic Effects of Changing the Ohio Sales Tax: Estimates Using the BHI State Tax Analysis Modeling Program (Boston, Mass.: Beacon Hill Institute, Suffolk University, January, 1998).

[4]"Ohio Sales tax Hike From 5% to 5.5% Would Destroy 49,000 jobs, Cut Capital by $4.4 Billion," BHI Fax Sheet (Boston, Mass.: Beacon Hill Institute, Suffolk University, January, 1998).

[5]For reviews of this research see Eric A. Hanushek et al., Making Schools Work: Improving Performance and Controlling Costs (Washington, D.C.: Brookings Institution, 1994), Chapter 3 and "The Economics of Schooling: Production and Efficiency in Public schools," Journal of Economic Literature 24, no. 2 (1986), pp. 1147-77. For applications to Ohio, see Samuel R. Staley, "700 Million dollar Plus School Funding Increase is Not the Answer," Perspective on Current Issues (Dayton, Ohio: The Buckeye Institute for Public Policy solution, November, 1996): Richard Vedder, Alfred Eckes, Luther Boggs, Testing and Education Achievement: Ohio and Nation (Athens, Ohio: Contemporary History Institute, Ohio University, September, 1994).

[6]Caroline M. Hoxby, "Local Property Tax-based Funding for Public Schools," Policy Report No. 82 (Palatine, Illinois: Heartland Institute, May, 1996). See also, Thomas A. Downes, "Evaluating the Impact of School Finance Reform on the Provision of Public Education: The California Case," National Tax Journal 45 (December 1992), pp. 405-19.


Format revised on 18 August, 2004