In his new budget proposal, Ohio Republican Gov. John Kasich calls for extending a generous 21 percent cut in state income taxes. The measure was originally part of a sweeping 2005 tax overhaul that abolished the state corporate income tax and phased out a business property tax. The tax cuts were supposed to stimulate Ohio's economy and create jobs. But that didn't happen once the economy tanked. Instead, the changes ended up costing Ohio more than $2 billion a year in lost tax revenue; money that would go a long way toward closing the state's $8 billion budget gap for fiscal year 2012.
"At least half of our current budget problem is a direct result of the tax changes we made in 2005. A lot of people don't want to hear that, but that's the reality. Much of our pain is self-inflicted," said Zach Schiller, research director at Policy Matters Ohio, a liberal government-research group in Cleveland.
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Before California's Proposition 13 triggered a nationwide tax-cut revolt in the late 1970s, state and local taxes accounted for nearly 13 percent of personal income in 1972, Bartik said. By 2007, it was 11 percent.
State corporate income taxes have fallen as well. Once nearly 10 percent of all state tax revenue in the late '70s, they accounted for only 5.4 percent in 2010.
"It's a dying tax, killed off by thousands of credits, deductions, abatements and incentive packages," according to 2010 congressional testimony by Joseph Henchman, the director of state projects at the Tax Foundation, a conservative tax-research center.
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Business tax reductions may be overrated as an economic stimulus because they're so low on the totem pole of expenses. For most businesses, the cost of labor is probably 15 times the cost of all state and local taxes, said Bartik of the Upjohn Institute.
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