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Mark Naymik
By Mark Naymik August 4, 2010

Ted Strickland boasts Ohio’s small business climate is tops in Midwest

In the race for governor, the story of the state’s attractiveness to business is a tale of two Ohios. In Democratic Gov. Ted Strickland’s version, the state’s tax laws, location and workforce make it appealing, especially to small businesses. In Kasich’s narrative, Ohio’s tax system and regulations are driving away all businesses.

Each cites different studies to help make his case.

"In 2009, the Small Business & Entrepreneurship Council ranked Ohio 11th in the nation and 1st in the Midwest for overall business climate," the governor said in a July 17 news release. We decided to take a closer look.

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Strickland, who made the statement in response to a Kasich ad that blamed the governor for Ohio’s jobs losses, was referring to a December 2009 study entitled "Small Business Survival Index 2009: Ranking the Policy Environment for Entrepreneurship Across the Nation." The study was produced by the Small Business and Entrepreneurship Council, or SBE, a trade group that represents small businesses and advocates for less government regulation.

The 2009 study -- the SBE’s 14th survival index -- is a more objective look than say, surveys of CEOs or other business professionals, which do not rely on hard numbers. The SBE rankings evaluate states in 36 categories, including corporate and income  taxes, gas and diesel taxes, government spending, health care and energy costs, inheritance taxes, and workers compensation costs. Business and tax experts agree that these are among key factors business owners and entrepreneurs examine when considering where to locate.

Ohio does rank 11th overall in the 2009 SBE index. But whether Ohio is No. 1 in the Midwest depends on how you define the Midwest.

Strickland relies on the Ohio Business Development Coalition, which supports the state’s economic development efforts. In a news release, it defines the Midwest as Ohio, Indiana, Kentucky, Michigan, Illinois, Wisconsin and Minnesota.

The U.S. Census Bureau defines the Midwest differently. It doesn’t include Kentucky, which lands in the South, but it adds Iowa, Kansas, Missouri, Nebraska, North Dakota, and South Dakota.

Ohio still beats them all -- except South Dakota. While Ohio is more likely to compete with nearby states, the Mount Rushmore State’s ranking tops SBE’s entire survey. One reason: South Dakota is among a handful of states without a personal income tax. Small business operators find that attractive because, as the SBE and other groups often point out, about 90 percent of them file taxes as individuals -- sole proprietorships, partnerships and S-Corps -- and don’t pay corporate income taxes.

Strickland’s critics like to cite the personal income tax rate, which is high compared to about half of the other states. The conservative Tax Foundation, which Kasich frequently points to, and others say Ohio’s personal income tax, coupled with local taxes, makes the overall tax burden unattractive to business. The Federation of Tax Administrators’ tally of total state and local tax burden ranks 29 states better than Ohio.

But the Federation of Tax Administrators warns that state and local tax burden calculations don’t tell the whole story of any business climate. In Ohio, for example, tax reforms begun in 2005 replaced the corporate franchise tax with an activity tax, a move that has made Ohio more attractive to businesses.

"What would make that a bad tax would be an increase in its rate," says Thomas Zaino, a tax attorney and Gov. Bob Taft’s state tax commissioner who helped lead the tax reform.  "Where Ohio’s tax system is out of kilter with other states is with personal income tax, which includes both state and local and school income tax. We are way out of line."

This brings us back the 2009 SBE survey.

It looked at Ohio’s top personal income tax rate at the time of 5.925 percent. And it considers both personal and corporate taxes and other categories that reflect the state’s larger narrative about business climate. So while Strickland may overstate Ohio’s Midwest ranking, his claim about the SBE’s rankings is on point and the SBE’s methodology reflects the larger context of the tax debate.

We rate Strickland’s claim Mostly True.

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