COLUMBUS, Ohio – The real wages of Ohioans are expected to fall beginning next year for the first time in state history, Gov. Ted Strickland predicted Monday.
The dire economic prediction came as Strickland also announced that Ohio’s next two-year budget faces a projected $7.3 billion deficit, fueled in part by declining wages.
To a state whose manufacturing sector has shrunk and whose population has stagnated, the revelation that wages are set for a historic plunge felt like yet more dismal news. But experts are divided on how exactly to view the decline. Is it an omen that paychecks are soon to be slashed, or simply an indication of what most Ohioans already know: In this economy, their dollar buys less.
AP PhotoOhio Gov. Ted Strickland is shown in a photo from Sept. 2008 in Columbus. Strickland announced that real wages of Ohioans are expected to fall next year for the first time in state history.When there’s a price increase of something in the basket – food, gas, electricity or electronics, for example – the buying power of the dollars consumers earn go down.
Ohio builds its state budget every two years on two main taxes: the personal income tax and the sales and use tax. Both are closely linked to the strength of consumer buying power.
“CPI doesn’t really affect your income. If you made $1,000 last year, and you make $1,000 this year, your tax will be the same,” said Tom Zaino, a former state tax commissioner who now heads the Columbus office of the McDonald Hopkins law firm. “At the same time, you aren’t going to feel like you have as much money the next year because things cost more.”
When consumers purchase less, that hurts state sales-tax revenues. When consumers are forced to take losses on their investments, as has been the case over the past two months, those losses show up as part of their income, and that hurts income-tax revenues, Zaino said.
“The entire tax system is always based on economic activity,” he said.
Ohio wage and salary income is expected to fall from $222.8 billion this year to $222.2 billion by 2011, Strickland’s budget director, Pari Sabety, said Monday. Before the recent Wall Street meltdown, wage and salary income was projected to rise to $247.9 billion during that period.
Sabety predicted that personal income tax revenue will fall from $9.1 billion this year to $7.7 billion in 2001, marking the first two-year decline since 1972.
She also predicted that sales tax revenue will fall from $7.6 billion this year to $7.4 billion in 2011, suffering the first two-year decline since 1950.
Tax revenues have already plummeted over the past 10 weeks, she said, and an extended recession could make the economic situation even worse.
The national economic picture, the decline of Ohio’s manufacturing-intensive economy and phased-in reductions in state income taxes are contributing to the revenue crisis, said Zach Schiller, research director for Policy Matters Ohio, a Cleveland-based liberal think tank.
“We have, by policy, been reducing the revenue available to the state through our major tax overhaul of 2005, which, by the time it’s complete, will reduce personal income taxes by 21 percent, costing $2 billion (to the state),” he said. “I would ask: Why are we so busy cutting taxes when we’re in the middle of this maelstrom?”
But Zaino, who helped craft the 2005 tax package, said there is no evidence that those changes to the tax code are exacerbating the bad economy’s negative impact.
“It’s certainly not by any stretch entirely responsible for this problem. That’s simply the economy,” he said. “I would challenge someone saying tax reform is impacting this deficit, in terms of dollars in the door, because perhaps we would be under worse conditions without it. There’s no way of knowing.”
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