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Press Release

    Viewpoint: Ohio needs a limit on state government growth

    08/23/2005

    Alexander Tytler, an 18th century philosopher, had a warning for his fellow Scotsmen that Ohioans can now bear witness to.

    “A democracy cannot exist as a permanent form of government,” he observed about the fall of Athens. “It can only exist until the voters discover that they can vote themselves money from the public treasury. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.”

    It’s not too late for Ohio, though. Ohio voters will be able to heed Tytler’s warning by setting a limit on how much the state government can collect from its taxpayers when the Taxpayer Bill of Rights comes to the ballot next year.

    America was founded on the idea of limited government. As the Nobel Laureate Friedrich Hayek noted nearly half a century ago, limitations on government actually strengthen democracy. “These limitations were conceived to protect the people against those to whom they must give power,” Hayek states, “and they are the only means by which the people can determine the general character of the order under which they live.”

    Those who support the Taxpayer’s Bill of Rights are more in tune with the nation’s founders than those who would argue that limitations on what the majority can do are somehow undemocratic. Aside from the benefits of providing more security for the minority from the unbridled power of the majority, a Taxpayer’s Bill of Rights that limits the growth in state expenditures to the rate of inflation plus population growth will provide an atmosphere supportive of economic growth for the state.

    Ohio University Professor Richard Vedder has long shown that state economic growth is negatively related to both the level and growth rate of taxes. But he is not alone. The economics literature is replete with studies verifying this relationship, beginning with the 30 year old Harris Bank study that showed state taxes reduce economic growth. Ohio’s respected Buckeye Institute provides an excellent survey of this literature in Grinding to a Halt: Ohio’s Tax Policy and Economic Growth.

    While one may hear the argument that taxes are a small part of total costs and thus are not likely to affect economic growth, this premise is based on faulty logic. Economists have known for more than a century that businesses and individuals make decisions on the margin.

    Suppose that taxes are only 5 percent of the cost to a business of producing goods and services and that the only other cost is labor (which makes up the remaining 95). Suppose also that the cost of labor is the same in Indiana and Ohio, but that tax costs are 20 percent higher in Ohio. Then the business will locate in Indiana, since its costs are lower there. The point is that taxes can be the marginal cost. Thus even if they are a small portion of total costs, we should not be surprised to find that taxes are negatively related to economic growth.

    Ohio has been faced with a steadily rising burden of state and local taxes over the past 25 years. As a consequence, Ohio has moved from one of the lowest tax states to a point where the Tax Foundation now ranks its tax burden among the top 10 in the country. How much higher are Ohioans willing to go?

    The time may be for citizens to act, giving elected officials a clear message about how they expect the state legislature to act with their tax dollars.

    A Taxpayer’s Bill of Rights would create certainty for entrepreneurs and existing employers regarding how much profit they could retain from providing jobs, goods and services and lead to a growth in employment and income for Ohio residents. In addition, it would force the state legislature and the governor to face the structural problems of Medicaid and K-12 education rather than resort to ever increasing growth in spending. Placing reasonable limits on the growth of Ohio government will make the state an innovative leader whose citizens are finally given the freedom to prosper.

    Gary Wolfram is the George Munson Professor of Political Economy at Hillsdale College and an adjunct scholar of The Buckeye Institute for Public Policy Solutions