In Ohio, The Poor Are Getting Poorer

Columbus Dispatch - April 12, 2003
   

by Jon Honeck, in The Columbus Dispatch 

Faced with a $4 billion budget shortfall over the next two fiscal
years, the Ohio General Assembly must raise taxes to cover part of the
gap.

Lawmakers should do so in a way that gives attention to people’s ability to
pay. Low- and middle-income Ohio families pay a higher proportion of
their incomes to state and local taxes than higher-income families do.

This means the system is regressive, and it has become more so over time.
At the same time, income inequality has worsened in Ohio, as it has in the
nation. Ohioans at the top of the economic ladder gained far more from
the economic expansion of the 1990s than those at the bottom.

Given these trends, the revenue package adopted by the legislature should
include a temporary increase in the income-tax rate for those in the
highest bracket and a state version of the federal Earned Income Tax
Credit, to help working families in the lower brackets. The individual
income tax is the state’ largest single source of tax revenue.

Ohio’s income tax is assessed at nine graduated rates that increase at
higher levels of income. In other words, the tax divides a taxpayer’s
income into a series of stacked layers to which different rates apply. The
highest rate, 7.5 percent, is assessed on that portion of taxable income
above $200,000.

Less than 2 percent of tax returns pay the highest rate. These top earners
benefited the most from economic growth in recent decades, and they are
able to offset about one-third of a temporary rate increase by itemizing
federal deductions.

Because of its graduated rates, the income tax is progressive. Taxpayers
pay a higher proportion of income to the tax as earnings increase.
The graduated income tax does not offset the regressive effects of sales,
excise and property taxes, however. According to a study of Ohio’s tax
system by the Institute on Taxation and Economic Policy, state and local
taxes claimed on average nearly 11 percent of the incomes of nonelderly
taxpayers with incomes below $15,000 (the bottom fifth of earners) in
2002.

In contrast, nonelderly taxpayers with incomes above $261,000 (the top 1
percent of earners), paid on average just 6.7 percent of their income in
state and local taxes after federal deductions were taken into account.

While we don’t collect enough from families in the top brackets, Ohio is
one of the few states that impose an income tax on families with incomes
below the federal poverty line. Gov. Bob Taft has proposed some measure
of tax relief for these families, but a refundable Ohio Earned Income Tax
Credit would be a more comprehensive solution.

An Ohio credit set at 20 percent of the federal credit would provide tax
relief to more than 660,000 working Ohioans earning less than $33,692 a
year. This idea, already in place in 17 states, would lift about 8,000 Ohio
children above the poverty line. Tax policy must recognize Ohio’s
growing income inequality.

Nearly one-fourth of Ohio’s workers earn less than the federal poverty line
for a family of four. More than one in seven Ohio children live below the
federal poverty line. These grim statistics are not likely change soon.

From 1979 to 2001, the inflation-adjusted median wage of Ohio’s workers
actually declined. The earnings of the bottom 70 percent of Ohio’s
workforce fell, while the earnings of the top 20 percent rose. This growing
divide among individual workers is reflected in family income. Between
the late 1970s and late 1990s, the poorest fifth of families saw their
inflation-adjusted incomes drop by 5.4 percent, while the richest fifth saw
their incomes jump by 43.1 percent. Our tax system should reduce such
inequality, not increase it.

We need more revenue in Ohio. But we need to pay attention to how we
get it. Just increasing sales-tax and excise-tax rates, which are bound to be
the first preference of a conservative legislature, will only make life more
difficult for Ohio’s working families in the midst of recession. The
graduated income tax is the state’s only means of raising revenue that
takes into account a taxpayer’s ability to pay. We will see in the coming
months whether legislators have the political will to make constructive use 
of it.

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