Studies Question Tax-Cut Link to New Jobs
February 17, 2013 (The Columbus Dispatch, Ohio) For Gov. John Kasich, the concept is simple: Tax cuts lead to jobs.So with half of Ohio jobs created by small businesses, if you give them a tax cut, they will use that extra money to grow and create more jobs.
"We want to do everything we can to encourage job growth in small businesses," he said when rolling out his plan to cut state income taxes by 20 percent and give small-business owners an additional 50 percent reduction -- allowing most a total cut exceeding 60 percent."Our income taxes are too high, particularly as they affect small businesses' ability to pay," Kasich said.
Many of the business owners who joined Kasich to promote the tax cut said it would help them hire people, although some mentioned tax cuts far bigger than what Kasich is proposing. Greg Ubert of Crimson Cup Coffee & Tea in Columbus said the cut would "get me in the expansion mode ... which means more jobs."
But some studies and a number of progressive groups say that when one dives deeper into the numbers, the correlation between income-tax cuts for small-business owners and more jobs is strained at best. At worst, it just shifts the state's overall tax burden from the wealthy to the working poor and middle class.
That shift, they say, would come as the Republican governor also proposes an expansion of the sales tax to include dozens of previously untaxed economic activity, raising $3.1 billion over the next two fiscal years.
Kasich's income-tax cut "winds up being incredible poorly targeted, because the bulk of the money isn't going to go to businesses that are going to hire people and grow the economy," said Zach Schiller, research director for Policy Matters Ohio.
Ohio has about 1 million taxpayers who are at least part-owners of a business. But research by some groups, including the U.S. Small Business Administration, shows that about 80 percent have no employees beyond the owner.
A 2011 study by a pair of University of Chicago economists, Benjamin Pugsley and Erik Hurst, found that most small-business owners are skilled craftsmen, doctors, lawyers, real-estate agents and small shopkeepers who have little desire to grow.
"Most firms start small and stay small throughout their entire lifecycle," they wrote.
Under Kasich's plan, according to state data, a business owner with $500,000 in income would get a tax cut of about $17,000. The plan would cap the tax deduction at $750,000 in net income, so the maximum tax cut a married owner with two children could get is $26,000.
"The notion that they're going to run out and hire a lot of people is mistaken," Schiller said. " They wouldn't get enough."
It appears that most would get less than $17,000. In 2011, the Office of Tax Analysis at the U.S. Treasury Department attempted to define a small business and found that, using 2007 data, 40 percent reported a tax loss, and half reported a profit of less than $50,000. Only 0.5 percent reported income of more than $1 million, and roughly half of that was investment and rental income.
Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, wrote in November 2011: "Increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products."
Lee Beall, CEO of Rea & Associates Inc., a Dublin accounting firm that serves more than 6,000 small-business clients, said it's hard to predict what an individual business owner would do with a tax cut, but that in the past three months more are talking about expansion.
Kasich is hardly alone in his pursuit of lower state income taxes. With backing from groups including the conservative American Legislative Exchange Council, GOP-controlled states including Indiana, Oklahoma, Kansas, Nebraska, North Carolina and Louisiana either have cut income taxes or are discussing it.
Some state officials, like Kasich in Ohio, are looking to make up revenue with higher sales-tax collections. State Tax Commissioner Joe Testa told lawmakers: "Many economists and tax-policy experts advocate ... consumption-based taxes over income-based taxes."
Critics say that, in Ohio, that will leave many middle-class and low-income workers paying an overall higher tax rate, while giving high-income earners a significant cut.
In his annual report for ALEC, economist Arthur Laffer found that a majority of new jobs created in the U.S. were in the nine states with no income tax, and those states accounted for 35 percent of all population growth, based on 2010 census data.
"The research is very clear -- high taxes mean low economic growth," said Richard Vedder, an Ohio University economics professor who has helped Kasich promote the proposed tax cuts. "Income taxes are the worst of all taxes from a standpoint of economic growth. This is a huge income-tax cut that is much needed."
Peter Fisher, research director of the Iowa Policy Project and a sharp critic of Laffer's research, said that state tax cuts have limited impact because state and local taxes amount to less than 2 percent of the cost of doing business. "You just don't have much leverage ... even with substantial cuts."
Testa told lawmakers last week that Ohio's income-tax rates are too high, using the addition of municipal and school-district income taxes to make his point. Ohio's state-only income-tax rates are considered low to medium.
Ohio has nine tax brackets, and the top rate is 5.925 percent, ranking it 25th in the nation. That rate is paid only on income above $208,500; in 2010, 2.6 percent of Ohio tax filers earned more than $200,000.
Of the nine states with no income tax, Ohio's 6.7 percent December unemployment rate was higher than four and lower than four .
House Democrats have argued that the 21 percent state income-tax cut passed in 2005 produced no discernable positive results. Some have suggested that for businesses to get another tax cut, they should be required to show that they will use it to grow or improve their companies.
Roger Geiger, executive director of the National Federation of Independent Businesses/Ohio, called the tax cut "huge." He said most small-businesses owners will use it for hiring, equipment, marketing or other purchases that make them more efficient.
However, Geiger said, the tax complaints he hears most often are not about the rates, but about the complexity of a system in which so many municipalities also collect an income tax.
"It's the compliance cost that really drives them nuts the most, which is why municipal-tax reform is a high priority for us," he said.