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The moral case for progressive tax policy

Posted on 09/30/24 by Bailey Williams (he/him) in Revenue & Budget

Ohio families deserve a tax system that supports the public goods and services that all households need to thrive and where everyone pays their fair share based on their ability to contribute. Unfortunately, that is not the system we have today. After two decades of tax handouts to corporations and the rich, our upside-down tax system leaves the lowest earning Ohioan paying a higher rate of their income in state and local taxes than those in the top 1%. This inequitable tax system hinders the resources and services available to the average Ohio family. Instead of broad-scale rate cuts, lawmakers should turn to less-costly refundable tax credits like the Thriving Families Tax Credit (TFTC). These targeted tax cuts would put money in the pockets of working Ohio families and restore a sliver of equity to our upside-down tax system.

Thriving Families Tax Credit

The TFTC has been introduced as legislation in the Ohio General Assembly as HB 290. As introduced, HB 290 would offer eligible Ohioans a refundable credit of $1,000 per year for children ages 0-5, and a credit of $500 per year for children ages 6-17. Families making up to $65,000 would receive the full value of the credit. The credit would begin to phase out for families making above $65,000 until it completes the phase-out at $85,000.

According to modeling from the Institute on Taxation and Economic Policy (ITEP), a Washington, D.C. based nonprofit with a sophisticated model of the state and local tax system, more than 1.4 million children, about 60% of the children in Ohio, live in households that would be eligible for at least a portion of the TFTC. The ITEP modeling divides Ohio tax filers into five equal groups or quintiles. The first quintile is the 20% of Ohio tax filers with the lowest incomes, the fifth is the 20% with the highest. This helps us understand how tax changes are spread across the population. According to the model, eligible families would see their tax bills drop by $1,006 on average. These tax savings are even higher for taxpayers in the lowest-income 20%. Ohioans who get the credit in that group — those making less than $26,000 per year — would get an average tax cut of $1,114. Most of the tax credits would go to low- and moderate-income tax filers, and 97% of the total value of the TFTC would go to the 80% of households not among the wealthiest quintile. Standing in stark contrast to the income tax cuts in last year’s budget bill, the TFTC would provide a true tax cut to Ohio’s working-class families.

HB 290 also would make progress in the fight against racial inequality. In Ohio, Black and Hispanic families are overrepresented in the bottom 20% of the income scale.[1] Overall, Black and Hispanic families make up 13.1% and 3.5% of Ohio’s population, respectively. However, among the lowest-income 20% in the state, 20.3% of families are Black and 5.2% of families are Hispanic. In the bottom 20% of earners alone, roughly 135,000 Black and Hispanic children would benefit from the TFTC. In all, 83.7% of Black families and 79% of Hispanic families would receive at least some tax relief from the TFTC.

As introduced, HB 290 would provide targeted tax relief to low-income families. With no income requirement and full refundability, this guarantees the most economically vulnerable families will benefit from this tax cut. The phase-out provision will keep the overall costs of the TFTC down while keeping the benefits of the tax cut to families who stand to benefit the most.

According to ITEP, HB 290 would cost the state of Ohio roughly $910 million annually. Previous Policy Matters Ohio research has provided numerous ways to fund the TFTC. One example could come through the elimination of the unproductive business income deduction, also known as the LLC loophole, which by itself would generate roughly $1 billion in revenue. Another source of revenue could come from the restoration of higher income tax rates on those making more than $250,000 a year: less than 5% of tax filers, who have received giant state income tax reductions over the past two decades. The introduction of either of these revenue raising mechanisms would cover the cost of providing tax relief to those in our state who need it the most, while also reversing some of the tax shift to lower- and middle-income Ohioans that has occurred in this century.

Income tax repeal

ITEP has provided further modeling on what an income tax repeal would look like in Ohio. The biggest beneficiary of this repeal would be the wealthiest Ohioans. An income tax repeal would see the state losing just over $11 billion in revenue, with the top 20% of earners, meaning those with incomes above $133,900, capturing 69.64% of the tax cut’s value. By comparison, the bottom 60% of Ohio earners, or those making less than $79,200, would see just 11.21% of the value of tax cut.

Eliminating the income tax would devastate the quality of services the state provides for millions of Ohioans. Ohio spent just over $40 billion from the GRF in fiscal year 2023. Assuming no further tax changes to make up the revenue loss, the state would have to cut almost a quarter of its spending to balance the budget from a $11 billion deficit. That would be the same as completely cutting state funding for public K-12 education.

The contrast between a broad-scale income tax repeal and a refundable TFTC could not be starker. Eliminating the state personal income tax would mainly benefit the wealthiest earning Ohioans while hindering the state’s ability to provide other vital resources and services. Meanwhile, the Thriving Families Tax Credit is significantly cheaper while providing a greater tax cut to Ohio families who need it. This policy will help lower- and moderate-earning families by putting money in their pockets without destroying the public services all Ohioans rely on.

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