Higher sales tax means fewer jobs, less investment
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
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."
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 Ð factory
equipment, office buildings, delivery trucks and computers.
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%.
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%.
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.
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
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)
George V. Voinovich, "Hard Decision Lies Ahead on School
Funding," Columbus Dispatch September 14, 1997
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.
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).
"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).
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,
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.
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