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Three Reforms for Improving Ohio’s Competitive Advantage in the 21st Century

Dialogues

September 5, 1997

by J. Kenneth Blackwell
Treasurer, State of Ohio

Some things get better with time. Some things get worse. What separates the two is adaptability. The ability to react quickly, in order to turn crises into opportunity. It is the difference between a growing business and a dying business, between serving people and serving the status quo.


Allegiance to the status quo will hurt Ohio.


Ohio’s tax system confines business. The state’s collective bargaining system confines efficiency. And our public education system confines our future. If we continue to pour money into these molds, it will only set like cement. We must break these molds now, in times of economic ease, so that we have freedom of movement in tougher times.


We must reform three things.


One, Ohio’s tax structure. Turn it into an engine of economic growth instead of the vehicle of big government.


Two, Ohio’s public collective bargaining system. Give the private sector an opportunity to compete, and give the public sector the incentive and the ability to learn and grow in efficiency.


Three, we must reform Ohio’s public education system. There is no incentive for the current bureaucracy to change. Schools that fail our children survive despite low test scores, falling attendance and fiscal mismanagement. We must create a new system that corrects failure and rewards success.


TAX STRUCTURE


First, Ohio’s tax structure. Recent studies reinforce what over twenty years’ experience in public finance has taught me. Tax policy is one major reason why growth in income and job opportunities vary enormously across these United States. An analysis by the Federal Reserve Bank of Atlanta concludes, “If growth is a policy objective, one should . . . assess whether tax policies are out of line with other states. If long-term growth rates seem too low relative to other states, lowering aggregate state and local marginal tax rates is likely to have a positive effect on long-term growth rates.” Translation: lower taxes result in higher economic growth.


Ohio’s growth rate is definitely low relative to other states in our region. For example, compare growth in real incomes per person from the last business cycle, from 1991 through the third quarter of 1996. In the industrial Midwest, personal income growth per capita in Michigan, Indiana and Illinois all outdistanced Ohio.


In other states, income rose more than 40% faster in Texas and Florida than in their Sun Belt competitor, California. It grew 20% more in South Dakota than in North Dakota. Tennessee significantly outdid next-door neighbor Kentucky.


Why do some states outperform others with similar weather and location? One thing all the better-performing states have in common is a flat state income tax. By contrast, the poorer-performing states all have a highly graduated tax structure.


High marginal tax rates reduce the gains from work and enterprise. As a result, people literally pick up and move from graduated-tax to flat tax areas. From 1990 to 1995, the nation’s 16 flat-tax states had net immigration (of native-born Americans) of more than 1 million people. That’s about one thousand each business day — all coming from graduated-income tax states.


We need to make moving Ohio to a flat and simple tax system a top priority. A flat-rate system will satisfy the principles of simplicity, visibility and stability. A flat rate is clearly simple, and it’s highly visible: one rate — as opposed to the current, confusing mess — will stand out and be remembered. A simple, visible system can be stable: by keeping our eyes on it, we can keep politicians’ hands off it. That stability can be enhanced if we pass a taxpayer protection amendment to the Ohio Constitution requiring a three-fifths majority vote of the Ohio General Assembly or a vote of the people to change the established rate.


Nobel Prize-winning economist F.A. Hayek described economic redistribution through multiple tax rates as “the chief source of irresponsibility” in politics and “the crucial issue on which the whole character of future society will depend.” A system of graduated marginal rates violates the principle of fairness — that if a law applies to citizen A, it must equally apply to citizen B.


A 1994 report by the Governor’s Commission to Study Ohio’s Economy and Tax Structure addressed some of these same issues. This 15-member commission had representatives from business, unions, nonprofits and agriculture. After a nine-month study, they came up with a picture of Ohio’s overall tax structure, some of which matches that of Cleveland. This is from a summary of their final report:


“Our economic and population structure is changing. We are less of a manufacturing center and more of a producer of services, earn more of our income from transfer payments and less from wages, consume more services than goods, and are home to increasing numbers of the elderly and a growing concentration of poor.”


“With this backdrop, two questions have been central to our work. The first is whether the present tax structure is consistent with the objective of attracting more investment and jobs to the state, and moving Ohio to a higher economic growth path. The second is whether the present tax system “fits” our new economic structure and spreads the tax burden fairly over all sectors of the economy. We find the present tax system deficient on both counts and recommend a comprehensive reform.”


This was in December of ’94. Comprehensive tax reform is long overdue.


We are no longer competing just with states in our region, or even our country. We are in a global marketplace. Commerce finds the path of greatest opportunity. If we favor taxation over commerce, if our first impulse is always to trust government rather than an optimally unhampered market, if we maintain high marginal tax rates and excessive taxation, we redirect business elsewhere. And we do so at the expense of major cities like Cleveland, Toledo and Cincinnati to name a few.


COLLECTIVE BARGAINING LAWS


We have the same problem in Ohio’s public collective bargaining laws, which is my second point. Again, the default position is set to the status quo. And again, the result stifles competition, limits efficiency and raises the cost of government.


We are fond of saying we do more with less. But the current two-year state budget is the largest in Ohio’s history. It represents an eight percent increase in spending over the last two-year-budget. And — I tell you this because I know, I’ve been there and know how the bureaucracy works — the budget isn’t based on the last budget’s spending levels. It’s based on the appropriations levels. Bureaucrats build themselves a buffer, and that’s why you get an eight percent spending increase, which is much larger than either inflation or private sector income growth.


So, that’s not doing more with less. It might be doing more with more. Or it might be doing less with more. We won’t be able to truly do more with less until we get our arms around big government, to control its growth. And we can’t do that until we address the issue of collective bargaining in the public sector.


Cleveland is a perfect example. Just last year, Mayor White’s cry for reform made him a hero to some and a target for others. At issue were administrative changes that would cost no jobs, and bring more police officers out from behind a desk and onto the street. Mayor White also introduced competition into a waste collection monopoly, saving taxpayers hundreds of thousands of dollars over the last year.


Yet these changes were met with outrage. Mayor White’s lawyers met legal resistance in courtrooms that would have been impossible in any of the 33 other states with public collective bargaining laws. Because Ohio’s laws are nationally recognized as the most unbalanced, the most biased, and the most divergent from the National Labor Relations Act.


In fact, in Ohio, a union employee in the public sector has more bargaining power than a union employee in the private sector. And it is perfectly appropriate for Mike White , or anyone elected to protect the interests of Ohioans, to stand up and say, “This is wrong. We need to change it.”


The origins of Ohio’s collective bargaining laws are mainly political, shaped in the State House in 1983. But the results are real, and they fall hardest on those who can least afford them. The Plain Dealer’s Dick Feagler often writes about the most popular form of urban middle-class protest. It’s called moving to the suburbs.


The result is a city locked into a vicious trap. When the cost of services is too high, you lose what are called net taxpayers: people that pay more in taxes than they demand in services. What’s left are less mobile, lower income and often older communities — people that demand more in services than they pay in taxes. The city ends up demanding more in taxes from those least able to pay. In 1983, Ohio politicians wrote a check to Ohio’s public unions. Those communities are still paying for it.


We see the same thing in Columbus. Last week, the Columbus teachers’ union president John Grossman met with his members. He held up their contract from 1969 — a one-page document. Then he held up the current, 122-page contract, and called it progress.


That’s not progress. It’s inertia. It’s a bureaucracy entrenching itself. And the losers are the ones locked into the system — in that case, the students of Columbus public schools.


In the private sector, people recognize the bottom-line cost of losing employer flexibility. If government takes away an employer’s prerogative to make policy decisions like closing a plant or opening a plant or inserting a night shift, people recognize that that costs money. It raises the cost of doing business.


The problem is, people don’t recognize that government in most of its areas can also be operated like a business. Maybe it’s because the public sector isn’t always accountable to the bottom line. Maybe it’s because the costs are hidden in catch phrases like “administrative costs.” Maybe it’s because people expect government to be expensive and unmanageable.


In more than 20 years of public service, I have said a lot of things to which people object. I’ve told banks they should do business in the inner city, and I’ve told Republicans that I want to be governor. But, in over 20 years, the hardest sell has always been to stand in front of a group of people, and tell them government doesn’t have to be expensive and unmanageable. For some reason, people will not believe it. But I keep saying it, because it’s true.


The changes we need in Ohio’s collective bargaining law are not anti-union. They will not repeal public employee collective bargaining. They will, however, enable our elected public officials to deliver services to you more effectively at lower cost. We’re talking about simple changes.


- Shorten the time it takes to resolve disputes through fact-finding and arbitration.


- Exclude top supervisors from labor bargaining units.


- Give the State Employment Relations Board the authority to penalize people who file frivolous charges.


This is not about doing away with collective bargaining law. It is about providing better service. It’s about how we spend money. And I would add that it’s about positioning an entire state and its cities, villages and townships to be responsive and competitive in the next century.


PUBLIC EDUCATION SYSTEM


My third and last point is that we need to reform Ohio’s public schools for the same reason. We are in the dawn of the Information Revolution. But our schools still schedule by the fall harvest. We are asking our kids to drive a tractor onto the information superhighway.


The most debilitating factor is the lack of incentive for the current bureaucracy to change. Our current education system is an accountability nightmare. It is structured so that nobody’s success depends on their students’ success. Folks get paid whether or not the district accomplishes its mission. We must take the power of the purse away from school districts, and give it to the parents of our school children. Invest in a competitive system that will equip our workforce for worldwide competition and global markets.


We should be thankful Ohio’s General Assembly didn’t rush to raise taxes by a billion dollars to satisfy the Supreme Court’s ruling. Harvard economist Caroline Hoxby correctly characterized the school funding problem “a failure of productivity rather than a failure of spending.” Cleveland schools funding stands at somewhere around $7,500 per child. Obviously, money isn’t the solution.


The Ohio Supreme Court issued two requirements, one for a “complete systematic overhaul,” and the other for “an entirely new funding system.” Wednesday, the General Assembly named two joint committees to renew the debate. Before placing another billion-dollar price tag on education needs, let’s decide what to spend it on.

A Child Centered Funding system of education would meet the court’s requirements, and introduce competition into the education monopoly. When has an Ohio school been closed because of poor performance? Nothing in the current system closes a bad school or expands a good one.


Child Centered Funding does. It allows a parent to say: “If my child is not learning, not only am I going to remove her from the school. I am going to take my money with me.” If schools want to stay in business, they will find a way to meet student and parent needs. Accountability increases because school systems’ success is tied directly to students’ success.


Again, there isn’t a better argument for child-centered funding than Cleveland. In Ohio, Cleveland should be revered as the home of three things: rock and roll, baseball and, most importantly, school choice. In 1995, the Hall of Fame opened and the Indians won the American League. The trifecta will be complete when the Ohio Supreme Court recognizes that Cleveland’s school vouchers are the best way to give our children equal opportunity since the concept of public education was introduced.


Child Centered Funding would create a marketplace of education choices. It would empower parents to choose the best source of education services for the individual needs of their children. It would increase accountability. Best of all, Child Centered Funding would extend the level of school choice afforded by vouchers to every child in Ohio and any school that participates.


It is time we get serious about providing equal educational opportunities for all of Ohio’s children regardless of where their families can afford to live.


Presently, if students and their parents must live in a failing district, they have no options. It’s the urban flight cycle all over again. Those who are mobile, move. Those who can’t are held hostage by assigned districts who demand more money from those least able to pay, to support a failing system.


Changing the system would be easier if education leaders resistant to change would stop misleading us to believe that kids come first in the current system. Experience tells us differently. Under the present system, the preservation of adult interests comes first. Several years ago the former president of the American Federation of Teachers, the late Al Shanker said, “I’ll start representing students when students start paying union dues.”


The legislators’ task would also be helped if groups with a stake in the status quo and the media would stop the relentless guilt trip. The public is continually asked to provide more money to fix the education problem. If you don’t ante up then “you’re not for the children.” Hogwash.


Finally, school failures are blamed on low student motivation, or the difficulty of teaching inner city kids from low-income homes. But this lament over sending kids to school “ready to learn” sounds too much like, “send us better kids.” If there was one kid in the world who wasn’t always in a learning mode, it was little Kenny Blackwell, from a low-income working class family. Well, 40 years and one master’s degree later, I thank God for Ida Mae Rhodes, my fourth grade teacher.


I was a flip kid. I went into class one day and said, “Mrs. Rhodes, what’s the difference between ’I am rich’ and ’I is rich?’” She replied, “Me.”


Ida Mae had very powerful expectations, positive expectations for all the kids that she touched. We were expected to excel. And we did. I refuse to believe that the only kids you can educate are those from middle-income, two-parent suburban homes.


We don’t need better kids. We need a system that rewards better teachers. And not only reward them. It should provide incentive for others to emulate them. A Child Centered Funding system would do that. Not through an artificial bureaucracy, but through the natural selection process of a competitive market system.


In Ohio, bureaucracies defending the status quo threaten to paralyze growth and limit our opportunities into the next century. We must flatten and simplify our tax code. We must balance the laws that govern collective bargaining. And we must make our system of public education accountable to those it is meant to serve: students and their families. We must seek to crush bureaucracy, accelerate growth, and unleash human potential. Albert Einstein said, “the problems of today cannot be resolved at the same level of thinking on which they were created.” The institutions of the 20th century are not necessarily sufficient to make us competitive in the 21st. Only after we have broken free of bureaucracy can we start moving forward.

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