Washington Institute: Ohio Flat Tax Would Favor Wealthy

Hannah Report - October 3, 2006

The Hannah Report

“Replacing Ohio’s graduated income tax with a flat, 3.25 percent tax would increase taxes on most Ohioans, while costing the state nearly half a billion dollars in annual revenue. Meanwhile, the richest Ohioans would reap thousands of dollars on average in annual tax savings apiece.”

That in a nutshell describes Ken Blackwell’s single-tax system, claims the Democratic-leaning Policy Matters Ohio — a proposal which the gubernatorial hopeful has billed as an across-the-board tax amnesty for nearly two million low-income families, but which the think tank says would shift most of the burden into an actual tax increase on middle-class Ohioans.

Based on a state-by-state analysis from the national Institute on Taxation and Economic Policy (ITEP), Policy Matters said Monday that under the Republican plan, families in Ohio with an annual income between $30,000 and $46,000 would face a net tax hike of $237 a year, while the top one percent of wage earners would enjoy a tax cut of nearly $14,000.

“A flat tax would make middle-income Ohioans pay more, so upper-income Ohioans could pay less,” concluded the report.

Characterizing ITEP’s ‘microsimulation’ model as a “true” picture of tax policies, the Ohio group said the report compared a 3.25 percent flat tax to the current graduated rate when the recent 21-percent tax cut is fully phased in by the General Assembly, a time-frame which would be accelerated under current legislation. The Washington-based institute is frequently cited by Citizens for Tax Justice, which has linked corporate welfare and tax cuts for the wealthy to the ballooning federal deficit, and was used extensively during the 2001 congressional session to evaluate President Bush’s tax plan.

“Overall, 61 percent of Ohio tax-filers would pay more in state income taxes if this flat-tax proposal were enacted, while only 16 percent would pay less. The remainder would see no change in their income-tax liability,” said the ITEP report, citing diminishing returns from a single-tax system over time. “A flat-rate 3.25 percent tax will benefit fewer and fewer Ohioans as the already-enacted income tax cuts continue to phase in.”

Policy Matters provided the following table to compare the apparent impact of Blackwell’s proposal on various income brackets last year:

The state would not only lose a half billion dollars in revenue under the Blackwell flat tax, noted ITEP, Ohio taxpayers would actually receive less than half the purported benefit. That is because lower state taxes would cost Ohioans $272 million in write-offs on their federal returns to the IRS, the report said.

The secretary of state has focused more on the substantial tax credit poorer citizens would enjoy under the plan. Aside from contrasting interpretations of ‘middle income’ in the ITEP and Blackwell analyses, the latter has offered a different calculation of its impact, saying families in the $30,000 bracket would receive a 0.05 percent cut under the flat tax.

Like currently scheduled tax cuts, it would be some time before the single-tax system produced its intended result. Neither low-income or middle-income Ohioans, however they are defined, would see the real effect of a 3.25 percent flat tax until four years into the plan.


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