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Ohio turns back sales tax as BHI model shows job loss |
from NewsLink, Vol. 2, No. 2, Winter 1998
On February 4, the Ohio Legislature defeated a proposal to increase the state's sales tax rate by 1%, from 5% to 6%. Had the proposal passed, it would have gone to voters as a ballot issue on May 5. A proposal to increase the sales tax rate by half a percent, from 5% to 5.5%, was also defeated.
The debate over the proposed tax increase has been a contentious one in the state with supporters, including Governor George Voinovich, arguing the merits of the increase and detractors, including citizens' interest groups and policy research organizations, in vigorous opposition.
On January 16, the Beacon Hill Institute weighed in on the debate with the results of its economic modeling of the state of Ohio. At a news conference in Columbus, David Tuerck announced that the proposed 1% increase in the state sales tax would, at a minimum, result in the loss of 99,000 jobs, cause a shrinkage of $3 billion in state payrolls and leave Ohio's capital stock $8.8 billion smaller. The analysis showed that there is at least a 90% probability that this outcome would occur.
BHI found that the tax increase would eliminate 1.7% of the jobs in the state causing the unemployment rate to rise from 4.4% to as high as 6%.
Said Tuerck, "Our analysis shows that a state sales tax reduces business income. Less business income means less demand for workers and for factories, machine tools and computers. Whatever the benefits of raising the Ohio sales tax, the economic consequences are measurably negative."
The proposed sales tax increase came about as the result of a 1997 Ohio Supreme Court ruling that said funding for poorer school districts must be brought closer to the statewide average. This entails additional state spending of about $1 billion. Several proposals, including the 1% sales tax increase, emerged in response to the ruling.
BHI and the National Taxpayers Union of Ohio jointly participated in the news conference, with the close cooperation of the Buckeye Institute.
Following release of the BHI analysis, the Ohio Legislature took up a proposal to increase the sales tax by 1/2%, from 5% to 5.5%. That increase, according to BHI analysis, would, at a minimum, result in the loss of 49,000 jobs and leave Ohio's capital stock $4.4 billion smaller. It would lower employment by at least 0.87%. As a result, the annual payroll in Ohio would fall by $1.5 billion.
"Our mission is to provide solid econometric analysis so that policy makers and opinion leaders can make informed decisions about fiscal issues. We do that in Massachusetts, and we're pleased that we could add to the debate in Ohio," said Tuerck.
During the summer of 1997, as part of an enhancement of its state tax analysis modeling program (STAMP), BHI modified the model for application to Ohio. STAMP, which is based on a "market-clearing" approach to economic activity, provides a computer-based method for determining the economic effects of state tax-law changes. The model is currently able to measure tax policy changes in Massachusetts, New Jersey, Oklahoma, Ohio, and in limited form, in Iowa.
Subsequent to the Legislative turndown, Governor Voinovich is hoping to use a never-used 1851 constitutional provision to put the sales tax increase on the May ballot.
Scott Pullins, National Taxpayers Union of Ohio Executive Director, is not warm to this idea. "Ohio's leaders ignore the results of [the BHI] study at their peril."
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-1998. All rights reserved. Revised on 9/9/02 4:23 PM