The Ohio Statehouse. Photo by Jake Zuckerman, Ohio Capital Journal.
Eight Senate Republicans introduced legislation Tuesday seeking to zero out Ohio’s income tax by the year 2032.
If passed, Ohio would become the 10th state nationally without an income tax, which was first levied in 1972.
In fiscal year 2020, personal income taxes were the state’s No. 2 tax revenue source, driving in $8.3 billion, behind only the state sales and use tax ($10.9 billion). Personal income taxes drive about 28% of Ohio’s total collections, according to the state Department of Taxation.
Income tax rates depend on what workers earn. Under current Ohio law, people making less that about $22,000 don’t pay the tax. People who make about $217,000 or more pay 4.8%. The rest pay somewhere in between.
Income tax reductions or eliminations tend to favor wealthier residents, who pay larger shares of their income. States often replace the revenue via increases on consumption taxes — like on sales, alcohol, cigarettes, and gas — which hit low-income workers harder.
Supporters of abolishing the tax argue low tax climates attract more businesses and workers to states, which replace the revenue.
Sen. Stephen Huffman, R-Tipp City, introduced the proposal, which would phase the tax out over the course of a decade. He said the economic growth created by the tax cuts will pay for the revenue losses they incur. Moreover, he said Ohio’s economy has strengthened over the last decade while the current and previous governor signed gradual income tax reductions. He said he has no plans to increase taxes elsewhere but the decision would be up to future lawmakers.
“I believe that the hole will be filled with economic development,” he said.
The legislation is likely to face resistance from Democrats, though Republicans hold supermajorities in both chambers and control the governor’s office. Huffman said he has not directly discussed the proposal with Senate President Matt Huffman, a Lima Republican who is his cousin, but noted that the senate president shepherded income tax cuts through the state budget last summer.
In income tax debates, liberals often look to Kansas. In 2012, Kansas GOP Gov. Sam Brownback signed legislation eliminating the state’s income tax for the owners of pass-through businesses, eliminated its top tax bracket, and cut rates across the board, all under the premise that doing so would foster an economic rocket ride. Instead, the state’s job growth proved sluggish as it was forced to slash spending and increase its sales tax. In 2017, the state’s Republican-controlled legislature passed legislation that reinstated the taxes, going as far as to override Brownback’s veto, according to The Kansas City Star.
One of two things will happen if the same idea passes in Ohio, according to Zach Schiller, a progressive economist with Policy Matters Ohio. Either taxes increase somewhere else like the sales and use tax, or libraries, snowplows, parks, and other services get cut.
“I think it points out one of the chief flaws in this kind of idea,” he said. “You’re either going to impose higher taxes on people who are less able to pay, or you’re going to reduce public services, or some combination of the two.”
Schiller said every tax cut comes with hollow promises of economic growth that seldom pan out, yet simply allow wealthy people to pay less in taxes.
Richard Vedder, a more conservative economist and professor emeritus at Ohio University, disagrees. He said if you look at the nine states without an income tax — Washington, Nevada, Wyoming, South Dakota, Texas, Tennessee, Florida and New Hampshire — they’re experiencing lower median unemployment rates and have been attracting new residents from other, higher tax states like New York and California, although he acknowledged a litany of factors affect the latter.
“The experience I’ve seen over the years with income tax is they tend to discourage productive creation and use of resources, and reduce output,” he said.
Vedder hasn’t reviewed Huffman’s proposal but said he generally supports phasing out the income taxes over a decade.
He offered a slightly more nuanced approach, however. For instance, lawmakers could tie the tax reductions to the fiscal health of the state, ensuring the state doesn’t pay for the cuts by depleting its rainy-day fund. Secondly, it can focus its spending power on safety net programs and refrain from replacing the revenue with taxes that hit poorer people the hardest, like a sales tax on food or gas.
Rea Hederman, vice president of policy for the Buckeye Institute, a conservative think tank, called the bill a great conversation starter. While not a dollar-for-dollar match, he said it’s likely that cutting income taxes would require reeling in spending or closing other tax loopholes elsewhere.
“You can’t just assume that you’re going to make up everything through economic growth,” he said. “Economic growth can fill a lot of it but it’s not 100%.”
Kansas, Hederman said, didn’t restrain pending or tie its tax cuts to any economic triggers, which doomed the execution. He offered Tennessee as a counter, where Nashville’s population boom is buoying the state’s economy. The state’s median householder income ($56,000) ranks ninth lowest nationally, according to data from the U.S. Census. Its unemployment rate (3.2%) beats the national rate of 3.6%.
Ohio’s income tax traces back to 1912 after voters approved a constitutional amendment allowing lawmakers to levy the tax. It was first imposed in 1972, and Ohio voters rejected a constitutional amendment that would have repealed it. Since 1985, Republicans have consistently lowered the tax rate.
In the current state budget, enacted last summer, lawmakers eliminated the top income tax bracket (allowing the state’s highest earners to pay a lower rate) and reduced taxes across the board.
Policy Matters Ohio noted in a report at the time that the cuts provided modest savings for average Ohio earners but $5,400 per year for the top 1% of earners.
In the last decade, lawmakers have scrapped several other taxes aimed at the wealthy. In 2011, Gov. John Kasich signed a law eliminating the estate tax, which imposes a levy on estates worth more than $338,000.
In 2013, they exempted owners of limited-liability companies, “S corporations,” partnerships and other pass-through entities from income taxes on their first $250,000. This costs the state more than $1 billion annually in revenue.
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