By Spencer Hunt
Enquirer Columbus Bureau

The Enquirer is examining key issues in the campaign for governor and how each major-party candidate would address them. Today: Taxes.

COLUMBUS - State politicians looking for tax dollars over the past four years increasingly turned to Ohio's families instead of its businesses.

As voters prepare to go to the polls Tuesday, an Enquirer analysis shows their financial stake in government is growing. The personal income taxes Ohioans pay every year take up more and more of the state budget as corporate taxes shrink.

The state and local tax burden for every man, woman and child in Ohio, is $2,870 according to U.S. Census data. That puts Ohio 20th among the 50 states. The national average is $2,986.

HAGAN ON TAXES

Democrat Tim Hagan said he would ask voters to raise taxes only if lawmakers fail to pass his plan to cut corporate tax loopholes, cut spending and put video slot machines at racetracks. "If you adopt this plan in its entirety, we won't have to discuss a tax increase," Mr. Hagan said in September when he introduced a proposal to balance the budget within his first 180 days in office. Mr. Hagan thinks the state could raise as much as $500 million by eliminating a series of credits, exemptions and loopholes that help lower businesses' taxes. Another $500 million would be raised by placing video slots at Ohio's seven race tracks.

TAFT ON TAXES

Gov. Bob Taft disagrees that Ohio's budget deficit will be as high as $4 billion. He argues a turnaround in the economy between now February, when work on a new two-year budget begins, could dramatically change the state's fiscal fortunes. As with two previous budget crises, Mr. Taft said he'd first look to make cuts at state agencies. "The chances are, even with tightening our belt, we will need additional revenue," Mr. Taft said. "We will look first to tax loopholes and to narrowly drawn revenue enhancements that will not damage the competitiveness of the Ohio economy as we try to come out of the recession."

Those estimates don't show a steady increase in local property taxes. They also don't include recent tax increases on tobacco, trust funds and businesses GOP lawmakers passed to balance the budget this year.

With a deficit of up to $4 billion looming in January, even bigger tax hikes may be coming.

That's why taxes, a tough issue in any election year, have become the question most likely to make Ohio's 2002 candidates stutter. It's also why a panel of state officials and lawmakers looking at tax reforms aren't offering anything substantial yet.

State Sen. Eric Fingerhut, D-Cleveland, blames Ohio's money troubles in part on Republicans who gave away too many tax exemptions and credits to businesses. If all those tax credits were deleted, he thinks the state could lower its tax rates and still collect more money.

"There's a strong group of us that thinks this is a better way to go," Mr. Fingerhut said.

Republican task force members, including the chairman, Ohio Tax Commissioner Tom Zaino, say the state's tax code and policies are too complex for simple solutions. "They don't take everything into account," he said.

Taxation statistics show personal income tax revenues have risen from $6.9 billion in fiscal year 1998 to $8.1 billion in 2001. At the same time, corporate franchise taxes dropped from $1.3 billion in 1998 to $973 million in 2001.That has made state government more dependent on income taxes.

Corporations supplied 9 percent of all state general revenue funds in 1997, but only 4.6 percent in 2002.

Personal income taxes accounted for 42 percent of the state's general revenue funds in 1997. That figure increased to 47 percent of state funds in 2002.

Outside of state government, the property taxes schools and local governments rely on have risen 90 percent over the past decade. A February 2002 analysis from the bipartisan Ohio Public Expenditure Council showed property taxes increased a record $516.1 million in 2000 alone.

While Mr. Zaino says these figures are accurate, he also says they don't provide a clear picture of what happens in Ohio.

One of the main reasons property taxes are up in Ohio is that voters have approved levies and bond issues. Rising home values and new construction also add to the property tax base.

"The one primary characteristic about the property tax is that it's a locally-enacted tax," Mr. Zaino said. "It's the single tax that Ohioans actually get to decide how much they pay."

Where state taxes are involved, some small- and medium-sized corporations can now legally file personal income tax returns instead of corporate franchise taxes. While it is true lawmakers granted corporations several tax breaks over the past decade, Mr. Zaino said Ohio loses more money when corporations shift their income to tax haven states.

Andrew Doehrel, president of the Ohio Chamber of Commerce, argues businesses still see Ohio as a high-tax state.

"There is a vast array of taxes placed on businesses in this state," Mr. Doehrel said. "They pay property taxes. They pay tangible personal property taxes. They're paying municipal taxes."

That's why local property tax abatements and tax exemptions are important to attract and keep jobs in Ohio, he said. For example, if a tax exemption on telephone call centers were removed, "they could easily move to another state," Mr. Doehrel said.

Mr. Doehrel and Mr. Zaino also blame Ohio's recent economic misfortunes for the drop in business tax revenues.

"Ohio is not in this budget situation because of a bad tax system," he said. "We're in this because the economy is terrible."

Faced with a $1.25 billion budget deficit created by the national recession, legislators passed a 31-cent tax increase on every pack of cigarettes sold in Ohio, established a new state tax on trust funds and delayed some business tax exemptions.

An even bigger problem lies ahead. Lawmakers face a budget deficit of up to $4 billion created by spiraling Medicaid costs, continued low tax revenues, school funding demands and the lack of over $1 billion in one-time funds spent to balance the this year's budget.

While more budget cuts and some Medicaid reforms seem likely, many observers warn more tax hikes may be needed to make ends meet.

While lawmakers did delay a research and development tax credit for some businesses, Mr. Zaino sounds wary of further tax increases on businesses.

"You don't want to be hurt existing small businesses and entrepreneurialism," he said.

Statements like that help Mr. Fingerhut conclude that no substantial changes in Ohio's tax policy are coming.

"I think there's a major philosophical rift here," he said. "If that's your position, that you can't change any of these (exemptions,) then you're pretty much tinkering around the edges."

Email shunt@enquirer.com