Raising the sales tax is not the answer to GCRTA’s funding woes

joe calabrese town hall

GCRTA CEO Joe Calabrese prepares to speak at the Clevelands for Public Transit town hall meeting on June 23 at Antioch Baptist Church (courtesy of Clevelanders for Public Transit).

Pragmatists have long invoked the phrase “Don’t make the perfect the enemy of the good.” Generally speaking, that’s solid advice. And, as a card carrying incrementalist sellout™, it’s something I can get behind. Most of the time, that is.

Some issues are so substantial, so systemic in nature, that tinkering on the margins is unlikely to remedy the problem. And that’s one of our major pathologies here in Cleveland. We seem to try tackling these big, hairy problems with the same tired toolkit of solutions, despite the fact that they haven’t worked yet. There’s only so many times you can run headlong into a brick wall.

The problem isn’t that we make the perfect the enemy of the good. It’s that, in Cleveland, we tend to make the facile the enemy of the good.

In other words,  I mean that we almost always fall back on old ideas, regardless of whether or not they have worked or are the best tool for the job.

Our ongoing transit funding dilemma

Take public transportation. For years, transit boosters here have offered up exactly one solution for our system’s funding woes: make the State of Ohio pay its fair share. And, for the love of God, of course it should! But it’s not going to happen anytime soon.

Yet, even when we finally start talking about local funding options, we fall into familiar trap. At a town hall meeting last week, Newburgh Heights Mayor Trevor Elkins – the only member of the GCRTA Board of Trustees to vote against the new suite of fare hikes and service cuts – suggested that we raise the county sales tax to fund the agency.

Now, I’m not saying that there’s anything prima facie wrong with funding transit with sales tax revenues. Cuyahoga County voters approved a 1% sales tax to find GCRTA when it was established back in 1975, and this tax – still the most generous in Ohio – has been a resounding success. The fact that it continues to provide a majority of GCRTA’s revenue 41 years later, despite not being altered, is a testament to the fact that sales taxes can be useful policy tools.

The problem is that, while the transit tax itself hasn’t changed since 1975, the overarching conditions in the region have. Cuyahoga County’s ceaseless population loss has slashed the revenue generating potential of this tax by some $68 million.

Why is the answer always “raise the sales tax”?

Moreover, over the past two decades, Cuyahoga County leaders have turned consumption taxes into a veritable slush fund for bad ideas, many of which have degenerated into little more than thinly veiled corporate welfare. Want to build an oversized convention center and Medical Mart Global Center for Health Innovation? Let’s raise the sales tax! The Browns want a free, new scoreboard? Sin tax! The Republicans need hotel rooms? Bed tax!

Eventually, when you keep throwing tens of millions of good tax dollars after bad into these sorts of projects, people get wary. And, to be fair to Mayor Elkins, he said as much at the town hall meeting. But he still fell back on sales tax hike, perhaps because we lack the policymaking creativity to try something new. Cleveland’s leaders have no incentive to come up with good ideas when they can get away with the same old facile ones.

The problem is, just because something is easy to understand doesn’t make it an effective policy. Cuyahoga County already has the highest county sales tax rate (2.25%) and combined sales tax rate (8%) in the state. Franklin County is second at 7.5%. While we are no longer at the statutory sales tax cap (the state raised that to 8.75%), continually raising consumption taxes is not a long term recipe for success in a county that has been treading water, at best, for nearly 50 years.

Wait, you may say, didn’t you just say that sales taxes could be useful for funding transit? Yes, I did; but I don’t support this idea for a number of reasons, a few of which I will expound upon here.

The problem with raising the sales tax — again

First, as I already mentioned, Cuyahoga County residents already bear the single highest sales tax rate in the state. Raising it further will simply stress a shrinking tax base further.

Economists typically prefer consumption taxes to income taxes, because the latter tend to generate larger distortionary effects. But that’s not to say that consumption taxes don’t do this as well. By raising the relative costs of goods, sales taxes alter the equilibrium between supply and demand by decreasing the amount that people consume. This creates a market inefficiency, known as a “deadweight loss,” which reduces social welfare. It’s wonky as hell and seems weird, but it’s at the heart of economic theory.

Such deadweight losses have clear effects. According to a recent study by researchers at the Institute for the Study of Labor (IZA) in Germany, sales tax increases in the US harm localities. The study, which considers the effects of changes in combined sales tax rates on business activity from 2002-2011, found clear, negative effects.

Each 1% increase in the combined sales tax rate reduces total payrolls within a county, particularly among retail businesses and smaller firms. According to the authors, “These results show a clear negative and significant association between the combined state and county sales tax rate and total annual payroll.”

These deleterious effects are particularly apparent when a county’s sales tax rate is high in relation to neighboring counties. As the map below illustrates, the four counties bordering Cuyahoga have combined see taxes ranging from 6.5% to 7%.

ohio county sales tax rates

Combined sales tax rates in Ohio by county (courtesy of Ohio Department of Taxation).

Multiple studies have demonstrated that these types of cross-border differences can negatively affect the county with the higher rate. In a 2012 study (PDF), Jeffrey Thompson of the Federal Reserve and Shawn Rohlin of Kent State University examined how sales tax rate differences across state borders affected economic activity from 2004-2009. They found that when border counties raise their sales taxes by 1%, total employment falls by 3.8-5.8%. The bulk of this effect occurs in the retail industry, which sees a 7.6% decline in employment.

Second, it is a well-established fact that consumption taxes are regressive, as lower income residents end up paying a larger portion of their income than wealthier residents. This effect is concerning in Cuyahoga County, where we see extremely high rates of poverty and economic inequality in many areas. But this issue is even greater, in this case, as low-income residents are largely concentrated in impoverished neighborhoods within the City of Cleveland and inner-ring suburbs. Wealthier residents, in contrast, have moved out into the outer suburbs and exurbs.

Why does this matter? Because these suburbs are closer to the neighboring counties, making it easier for middle- and higher-income families to take advantage of lower sales tax rates. Consumers are far more likely to cross county borders to make purchases at lower sales tax rates if they live near those adjacent counties. According to Gary Cornia and colleagues (paywall), consumers are more likely to travel 5 kilometers (3.1 miles) a border to take advantage of lower sales tax rates, but that effect essentially disappears when you increase the distance to 30 kilometers (18.6 miles).

Moreover, the low-income residents residents living in Cleveland and the inner-ring suburbs are also far less likely to have ready access to a car. Compare Cleveland, where more than 10% of households lack a car, to Solon or Gates Mills, where that number is just 1.1% and 0.4%, respectively.

As Thompson and Rohlin demonstrate, “cross-border shopping is more prevalent when transportation costs are low.” This essentially guarantees that a sales tax hike will be uber regressive for low-income, transit-dependent Cuyahoga County residents, as they lack the means to avoid it readily. So they would bear an even more disproportionate burden of funding GCRTA, in addition to already shouldering the fare increases.

Third, raising the transit sales tax seems neither seems imprudent from a political perspective. Under Ohio law, county leaders can increase the sales tax by 0.25% to raise general fund revenues without triggering a vote. Our former County Commissioners took advantage of this back in 2007 for the convention center.

That option is not available for transit. Any effort to increase GCRTA’s sales tax rate would have to go before voters for approval. Now, it’s entirely possible that such a proposal would pass. Cuyahoga County voters have approved similar tax increases for far less beneficial purposes in the past. Yet, it’s not guaranteed. Summit County voters rejected this same sort of proposal in 2014 by a convincing 54-46 margin.

Are Cuyahoga County residents that much more inclined to support transit, particularly the type of voters who show up in off-year elections? Does it make sense for GCRTA and local officials to spend considerable political and financial capital trying to get approval for a proposal that does nothing to staunch the winds that have buffeted the transit system for decades?

Let’s choose good policy over simple policy

We know that GCRTA is a fighting a heroic, sisyphean battle against sprawl, population loss, and overbuilt vehicular infrastructure each day. So why don’t we pull policy levers that raise transit funds while simultaneously helping to remedy the underlying challenges?

There are two good options available that serve this dual purpose: a parking tax, which I have already proposed, and scaling up GCRTA into a real regional transit agency by incorporating the collar counties.

Both of these are possible under current law. They will require legislative action and voter approval at the local level, yes. But if we have to launch a campaign to gin up support for local transit funding, we might as well do it right.

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  • Usually I agree with you but I’m not convinced here. I think a five-county tax is not a good idea. Why would people who moved to Geauga County to avoid paying taxes and live on huge lots agree to pay higher taxes for transit service they obviously don’t value and which really can’t do a good job of serving them, given that they live on huge lots.

    • Tim

      Incorporating the collar counties is something that transit advocates have called for in this region for decades, which is why I posited it as an option. All those people who call for the expansion of the Red Line into Lake County are making this argument, regardless of whether or not they realize it. I don’t specify which counties should be incorporated if we went that route, though I don’t see a reason why Geauga needs to be included. It is still predominantly rural or exurban and lacks the population density to make transit feasible at all. I don’t see why we allow a county with 90,000 people to dominate so much of our regional conversation.

      But once we set aside Geauga, we can see that each of the other 3 collar counties *already have transit authorities,* which is another example of unnecessary duplication of bureaucratic entities in this region. Combining GCRTA, Laketran, Medina County Transit, the Brunswick Transit Alternative, and Lorain County Transit into a combined, truly regional transit authority would strengthen all of these entities going forward.

      That said, doing that would be damn near politically impossible, as it would require voter approval from each county and legislative approval from each entity. The parking tax is my preference, hence why I have written about it at length. If we have to spend political capital, spend it on something that makes sense.

      • Here’s my other critique. I agree that the sales tax is already too high. And that it is regressive. But I don’t think having a regressive tax is really such a big problem if it supports a service that on balance benefits poorer people more. I think we should talk about our options, but I don’t think the sales tax hike should be written off at all.

        • Here’s the other problem as I see it with taxing multiple counties, even if it was politically possible, and I agree that it’d be very difficult. In order to make it work politically, there would need to be a lot of emphasis on long-distance routes to suburban locations that probably wouldn’t be very well used. I wonder if it would be possible for certain zones within outlying counties to opt in to RTA.

          • Tim

            I don’t agree on the utility of raising the sales tax further, so I guess we’ll agree to disagree on that. It’s inherently regressive, will be borne more heavily by people who can’t shirk it by leaving the county for large purchase (making it even more regressive), is politically unpopular, and just increases the already high tax burden on the people of a stagnant county.

            As to your other question, Ohio Revised Code § 306.321 specifies the conditions under which jurisdictions can join an RTA. Any jurisdiction can do so if it pleases, but its leaders have to approve it, and its voters have to approve levying the tax upon themselves in a referendum.

        • neroden

          Is it even possible to raise a progressive tax at any level below the state level? Income tax can be highly progressive, but I don’t think the cities and counties are allowed to have income taxes.

          Regressive taxes may be the only tax option which is legal without state cooperation. Property tax is *slightly* more progressive than sales tax but not very.

  • Cleveland Streetcar

    Great post Tim.

    it hurts us to continue to pursue the same policy which may not be relevant to the needs of our community today and tomorrow.

  • neroden

    I have to correct one point. Honest economists generally prefer progressive income taxes to sales taxes, because income taxes which are higher on rich people actually *fix* a distortion. (Income taxes on poor people are a problem. Income taxes on rich people are 100% good. For the exceedingly wonky reasons why, look up “diminishing marginal utility of income and wealth”.)

    There are a lot of dishonest economists who are just lackeys for rich people who want lower taxes, though.