A Fiscal Wash

My father and I recently attended a National Federation of Independent Business (NFIB) meeting discussing tax reform and the state budget. We discussed a handful of topics, but the most memorable were Ohio’s budget and proposed new taxes.

Based off of the NFIB Quick Facts sheet that we received, the proposed budget has some noticeable spending increases, including a 6.9% education spending increase in 2014 and a 13.3% increase to Medicaid spending in 2014. The state also plans to sell bonds to fund the Ohio Turnpike reconstruction and economic development, which will be paid back with toll revenue from the Turnpike.

Simultaneously, the state plans to cut the sales tax by .5% and personal income taxes by up to 20%. These numbers are clearly not all of the cuts and spending increases that the budget outlines, but rather a snapshot of what the governor has proposed.

What really caught our attention was the governor’s plan to collect sales tax on services that have not been taxed in the past. The Dayton Daily News listed 83 services that could be added to the sales tax list, ranging from pet grooming to attorneys. Essentially, the state plans to tax any industry that is not tied to education, health or housing.

While some will argue that these businesses provide services to the public and should be taxed, the implications could be devastating. Looking back to November of 2012, Forbes ran an article detailing states that were in a “Death Spiral,” an abnormally high ratio of “takers” to “makers.” “Takers” were classified as state employees, recipients of social welfare program funds, and a +1 for every $100,000 in unfunded pension liabilities. The “makers” were categorized as individuals working in the private sector who pay taxes to support the “takers.” In Ohio, the ratio is 1:1. This is not as bad as New Mexico’s 1.53:1 ratio, but still nothing to be proud of.

By expanding the services that the state will collect sales taxes on, two things will happen. First, this will drive businesses away from Ohio and steer them towards states with lower or no sales tax for their industry. Second, it will require more tax collectors and specialists to be employed by the state. If we institute sales taxes on these industries, the state will be forced to hire more individuals (adding to the “takers” two fold, one for the number of state employees and one for their pension liabilities) and deter business growth in Ohio (decreasing the private sector work force), thus making the ratio even greater.

The argument in favor for this expansion is that by lowering sales tax rates and personal income rates, businesses will be more understanding of the broadening list of taxable industries. The thought that this will lead to economic prosperity is misguided; businesses that are forced to pay more in taxes will pass that cost along to end consumers, who will in turn pay more out of pocket. The end result is a wash with no net benefit one way or another, just another political charade.

There are 5 ways to lower the 1:1 ratio that we have and ensure a healthy Ohio economy for generations to come. We can raise taxes while middle class families continue to struggle, decrease the number of state employees by limiting the size of agencies and departments, reform social programs by taking Florida’s attitude towards the system, decrease pension liabilities by asking state employees to contribute more, or grow the private sector by providing tax incentives for businesses to open up shop in Ohio.

It is time for real change for Ohio’s fiscal policies. We cannot continue on the path of high spending and high taxing while presenting a false front to the public of lowering sales tax and income tax. We need businesses to start coming to the state, and if we grow the number of businesses that are here, we can lower unemployment and increase tax revenue simultaneously, without making any changes to the current system. We cannot tax our way to a healthy economy, only the private sector can make us strong once again.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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