In the recently-released 2016 Tax Foundation State Business Tax Climate Index, Ohio ranked 42nd (1st being the best, 50th being the worst) for the third time in the last four years. The Tax Foundation is based in Washington, D.C. and has done this analysis of the 50 states’ tax systems and how they compare with each other for the past 15 years. It is intended to show how well the respective states structure their tax systems and not necessarily to simply compare tax bases and tax rates.

The index considers five taxes – corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax – and weights each differently in terms of calculating the final, overall rankings. On each component, Ohio ranked as follows: Corporate tax – #26, Sales Tax – #30, Unemployment tax – #6, Property tax – #11, and finally, Individual income tax – #47. So, on four of the five taxes analyzed, Ohio is either at or near the average among the states (corporate tax and sales tax) or well above average, if not exceptional (property tax and unemployment tax). This begs the question why is Ohio ranked so low overall at #42?

It becomes apparent that Ohio’s low ranking is primarily tied to how the Tax Foundation Index analyzes the state’s individual income tax and how it is weighted. The weighting of each of the five taxes is as follows: 33.2 percent Individual income tax, 22.3 percent Sales tax, 18.5 percent Corporate tax, 14.8 percent Property tax, and 11.3 percent Unemployment tax. So, the two taxes on which Ohio scores best, property tax and unemployment tax, barely comprise one-quarter of its overall ranking.

The other major reason for Ohio’s low overall ranking is that the Tax Foundation scores states with no income tax or those with a single, flat rate much higher and those with high rates and progressive rate structures near the bottom. However, in this regard, while Ohio still has a progressive rate structure with nine brackets, our state has cut rates by over 30 percent over the last ten years. The top rate, after the recently-enacted state budget bill, is now just under five percent (4.997 percent). And even though the Tax Foundation acknowledges it will take Ohio’s recent income tax rate into account in its 2017 rankings, a comparison with North Carolina is instructive.

North Carolina made the most dramatic improvement in the Index’s history over the last two years – from 44th overall to 15th in one year – largely because it converted its graduated rate income tax with a top marginal rate of 7.75 percent to a single rate of 7.75 percent. Compare that to Ohio which, even though it has retained its nine brackets in contrast to North Carolina’s single rate structure, all Ohio income taxpayers are paying less, and in the vast majority of cases much less, than all North Carolina taxpayers. But yet Ohio is ranked 47th on the individual income tax component, while North Carolina is ranked 15th?

One could argue with the Tax Foundation conclusions about Ohio’s tax system. However, there’s always room for improvement, and lawmakers apparently agree. As part of the state budget, they created the 2020 Tax Policy Study Commission and gave it that very assignment: review the state’s tax structure and policies and make recommendations on how to maximize Ohio’s competitiveness by the year 2020 – including recommending how to transition Ohio’s personal income tax to a lower, flat rate by 2018.

What do you think Ohio needs to do to improve our tax climate? Email me your suggestions or tweet them to us at @OhioChamber using the hashtag #BetterTaxClimate.