Ohio State FairTax Estimates WITH the FairTax Passed
State FairTax Replacement Rate
FairTax Rate Calculation component
2004 Amount
(1) (2) (3) (4)
Gross State Product* FairTax Base (including government consumption) FairTax Base Reduction for Rebate State FairTax Base With Rebate
$419,866,000,000 $335,892,800,000 $72,846,204,917 $263,046,595,083 $7,881,510,000 3.00% [ 5.5%]
(5) Convert state general sales tax to state FairTax [existing Ohio state sales tax rate] (6) Revenues for potential replacement by Ohio FairTax* (7) State individual income taxes (8) Corporate Income tax (9) Property taxes collected by local governments (10) School district property taxes**
$8,705,161,000 $1,060,594,000 $9,210,000,000 $158,500,000
3.31% 0.40% 3.50% 0.06%
*These rates are for individual taxes. The revenue neutral state FairTax rate (i.e. conforming the state sales tax base to the FairTax base and rolling back the rate) appears in line (5). To determine the state FairTax rate necessary to replace any of the taxes in lines (6) to (10) you must add the replacement rate for that tax to the rate in line (5). For example, to replace the state income tax you would add the rate on line (7) to the rate on line (5), or 3.00 + 3.31 = 6.31.
Methodology Note: The above analysis does not factor in an increased level of economic growth that has been predicted by a number of economists to accompany the replacement of income taxes at the state level or income/payroll taxes at the federal level with the FairTax. Therefore, the above rates to replace the various revenue sources are conservative estimates. A description of the methodology follows. The estimates in the above chart assume that the State of Ohio conforms its state sales tax base to the base as defined in the FairTax legislation, HR 25, and that HR 25 has been enacted into law at the federal level.
Calculations by Karen Walby, Ph.D., Director of Research, FairTax.org, February 12, 2005.
Ohio State FairTax Estimates WITHOUT the FairTax Passed
FairTax Rate Calculation component FairTax 2004 Amount Replacement Rate
$419,866,000,000 $298,796,799,168 $72,846,204,917 $225,950,594,251 $7,881,510,000 3.49% [ 5.5%]
(1) Gross State Product* (2) FairTax Base (excluding government consumption) (3) FairTax Base Reduction for Rebate (4) State FairTax Base With Rebate (5) Convert state general sales tax to state FairTax [existing Ohio state sales tax rate] (6) Revenues for Potential Replacement by Ohio FairTax* (7) State individual income taxes (8) Corporate Income tax (9) Property taxes collected by local governments (10) School district property taxes
$8,705,161,000 $1,060,594,000 $9,210,000,000 $158,500,000
3.85% 0.47% 4.08% 0.07%
*These rates are for individual taxes. The revenue neutral state FairTax rate (i.e. conforming the state sales tax base to the FairTax base and rolling back the rate) appears in line (5). To determine the state FairTax rate necessary to replace any of the taxes in lines (6) to (10) you must add the replacement rate for that tax to the rate in line (5). For example, to replace the state income tax you would add the rate on line (7) to the rate on line (5), or 3.49 + 3.85 = 7.34.
Methodology Note: The above analysis does not factor in an increased level of economic growth that has been predicted by a number of economists to accompany the replacement of income taxes at the state level or income/payroll taxes at the federal level with the FairTax. Therefore, the above rates to replace the various revenue sources are conservative estimates. A description of the methodology follows. The estimates in the above chart assume that the State of Ohio enacts a state version of the FairTax, and the national FairTax has not yet passed. In this case the tax base would be less since government and internet sales would be excluded from the tax base.
Calculations by Karen Walby, Ph.D., Director of Research, FairTax.org, February 12, 2005.
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Description of Methodology While every effort has been made to provide useful and representative data in this analysis, this is not an exhaustive, dynamic work. We have used the most recently available data from third-party sources for this static analysis. We encourage its use as a starting point for more comprehensive modeling and analysis. Significant work by respected institutions has been done to model the effects of replacing existing income and Social Security systems with the FairTax, many concluding that significant economic growth would be the result. This foregoing analysis does not factor in these economic growth effects at either the state level or national level. Therefore, the Ohio FairTax rates to replace the various revenue sources are conservative estimates. While we can logically conclude that states using a FairTax system would benefit comparatively, the academic work for a state FairTax has not been undertaken. In order to estimate the state FairTax rates for Ohio, the following steps were undertaken: 1. Estimate the state FairTax base. 2. Adjusting the gross FairTax base downward to account for the rebate of taxes on spending up to the poverty level. 3. Determine the revenues to be replaced. 4. Calculate the state FairTax rate by dividing the revenue to be replaced by the net state FairTax base. Step One: Estimating the gross FairTax base for each state The national FairTax rate is calculated according to the methodology explained in David R. Burton and Dan R. Mastromarco, “Emancipating America From the Income Tax: How a National Sales Tax Would Work,” Cato Institute, Policy Analysis No. 272, April 15, 1997. A spreadsheet showing this computation for 2003 appears on the last page. Lacking such detailed data at the state level, the Ohio state FairTax base was estimated by applying the ratio of the US FairTax base to GDP to the Ohio Gross State Product. The reason it is referred to as the gross base is because it does not take into account the FairTax rebate. Step Two: Lowering the FairTax base to account for the rebate This analysis assumes that states will provide for a rebate of spending up to the poverty level, the same as the national FairTax. To adjust the FairTax base for the rebate at the national level, we calculate total poverty level spending for all households. This is accomplished by multiplying the poverty level consumption allowance (as determined by the Dept. of Health and Human Services poverty guidelines) for each household size times the number of households in that size group, and summing across all household size groups. This amount is then subtracted from the FairTax base. To derive the comparable rebate base reduction at the state level, the national poverty level consumption total is apportioned to Ohio based on the ratio of its population to total U.S. population. This amount is subtracted from the “gross” base resulting in the net Ohio FairTax base (after rebate). Step Three: Determining revenue to be replaced in each state State tax revenues are from the U.S. Bureau of the Census, State Tax Collections, 2004. Step Four: Calculating the revenue-neutral state FairTax rate The revenue neutral state FairTax rate is the rate that would generate the same amount of Ohio sales tax revenues as the existing state sales tax when applied to the same base as defined in the FairTax legislation, HR25 at the federal level. Since the FairTax base is much broader, a much lower sales tax rate will raise the same amount of revenue. This rate is calculated by dividing current Ohio state sales taxes (2004) by the state FairTax base after the rebate. The revenue-neutral rate being much lower than the current sales tax rate provides an opportunity for states to increase the state FairTax rate and use the “surplus” revenue generated to repeal/replace other taxes, such as property taxes.
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National FairTax Rate Calculation: 2003
Line 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Description Taxable item Personal consumption expenditures Purchases of new single-family homes Purchases of new mobile homes Improvements to single-family homes Less: imputed rent on owner-occupied housing Less: imputed rent on farm housing Additional financial intermediation services Foreign travel by U.S. residents Less: expenditures abroad by U.S. residents Less: food produced and consumed on farms State and local government consumption Gross purchases of new structures Gross purchases of equipment Federal government consumption Gross purchases of new structures Gross purchases of equipment and software Less: state and local government sales taxes Less: government education expenditures Less: private education expenditures Expenditures in U.S. by non-residents Travel to U.S. by non-residents National retail sales tax base Revenues to be replaced Income tax Estate and gift tax Payroll taxes Excise taxes Total Revenue-neutral rate calculation Tax exclusive rate (no rebate) Tax inclusive rate (no rebate) Base reduction equivalent for rebate FairTax base $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Billions 7,760.9 310.6 7.1 132.0 859.6 11.9 83.1 39.6 6.6 0.5 1,058.5 213.4 51.5 658.6 15.5 78.1 343.9 414.7 151.7 86.7 33.3 8,740.0 927.7 22.4 717.8 1,667.9 19.1% 15.9% $ 1,746.1 Total consumption allowance for 109 million rebate units Source NIPA Table 1.1.5, line 2 NIPA Table 5.3.5, line 20 NIPA Table 5.4.5B, line 40 NIPA Table 5.4.5B, line 42 NIPA Table 7.4.5, line 3 NIPA Table 7.4.5, line 5 Financial & risk Intermediation greater than NIPA definition One half of NIPA Table 2.5.5, line 110 NIPA Table 2.5.5, line 111 NIPA Table 2.5.5, line 6 NIPA Table 3.10.5, line 47 NIPA Table 3.9.5, line 24 NIPA Table 3.9.5, line 25 NIPA Table 3.10.5, line 12 NIPA Table 3.9.5, line 9 NIPA Table 3.9.5, line 10 NIPA Table 3.3, line 7 Table 255, SAOUS 2003 NIPA Table 2.5.5, lines 105 & 106 NIPA Table 2.5.5, lines 112 One half, SAOUS 2003 Table 1280
Dept. of Treasury; derived from Table B-81 ERP 2004 Dept. of Treasury; derived from Table B-81 ERP 2004 Dept. of Treasury; derived from Table B-81 ERP 2004
31 Net tax base $ 6,993.8 32 Tax exclusive rate (with rebate) 23.8% 33 Tax inclusive rate (with rebate) 19.3% Source abbreviations: NIPA – National Income Product Accounts, Bureau of Economic Analysis, US Dept. of Commerce, SAOUS – Statistical Abstract of the United States, ERP – Economic Report of the President.
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