Laying it out on the table - Ohio's Real Tax Burden

Recently, Governor Strickland and his Tax Commissioner made waves by publicizing a faulty study claiming Ohio enjoyed a low tax burden relative to its neighbors.

Reality says otherwise.

As we were the first to mention, the data used for the study was blatantly mischaracterized despite the strict warning from the very source of the data - the U.S. Census.

So what's the reality? Well, the Tax Foundation has come out this morning with an analysis that helps us figure that out.

On the surface this type of analysis seems cut and dry, but the numbers are easy to misinterpret. The FTA analysis of Census data used by Levin compares only state tax collections and not state and local tax collections, resulting in an apples-and-oranges comparison due to states having varying levels of local tax powers. (Ohio has high local tax collections.) Census itself warns that its data does not account for tax incidence and should not be used in this way. Yet the FTA and Levin use it in this improper way anyway.

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Local-level taxation makes up nearly 45% of all taxes collected in Ohio, relatively high among the states. Cherry-picking state data, as Levin did, thus results in an inaccurately positive measure for Ohio.

The delegation of powers and responsibility for services between localities and states vary greatly from one state to another. If two states provide the same level of services at the same costs, but one prefers to have most spending and taxing decisions made from the State Capitol while the other prefers localities to provide the services and collect the taxes, Levin's use of FTA data would suggest that the first state has a higher tax burden. In fact, they are equal.

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Imagine a piano teacher giving lessons to students from his house. Would anyone say that the piano teacher is paying for the lessons, just because the payments were collected in his house? Richard Levin and the FTA apparently would, since they do not understand the difference between tax collections and tax burdens. Collections are a measure of the total amount of money brought in within a given geographic area. Burdens are a measure of the taxes owed by people.

To get a true account of the tax burden borne by residents of Ohio, we must go beyond simply dividing tax collections by population. This is because the person who writes the tax payment check is not necessarily the same person who bears the economic burden of the tax. The Census Bureau understands this and includes the following warning in their State Government Tax Collections in 2009 report, from which the FTA obtained its tax data

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When one includes state and local revenue sources and accounts for tax exporting, as we do in our State-Local Tax Burdens report, Ohio's true tax burden per capita in 2008 stands at 18th nationally, with a tax burden per capita of $4,049, 17 places higher than the FTA ranking used by Levin. Ohioans spend 10.4% of their income on state-local taxes, the 7th highest in the United States, higher than the national average of 9.7%, and drastically higher than the FTA's ranking of 33rd. This is very different from the picture painted by those who wish to portray Ohio as a low-tax state.

Read the rest here. It's eye-opening and helps us all understand the reason Ohio continues to suffer from a mass exodus of businesses and some of the highest unemployment in the Midwest.