The Ohio Tax Formula: Make MORE, Pay LESS
Posted January 15, 2003 in Op-Eds
The state and local tax system is stacked against low- and middle income
Ohioans. The less you make, the greater the share of your income you have
to pay. As upside-down as that may seem, it’s getting worse.
So reported a recent study by the Institute on Taxation and Economic Policy,
a Washington, D.C., research group. ITEP used a sophisticated model of all
major state and local taxes to arrive at its results.
Non-elderly Ohio families that rank in the top 1 percent of the income range –
those making $261,000 a year or more – pay 9.7 percent of their earnings in
state and local taxes. The lowest fifth of families – who make less than $15,000
annually – pay 11 percent.
Why does this matter?
Because Gov. Bob Taft and Ohio legislators are busy analyzing the
state’s tax system, looking both at possible long-term changes to
improve its structure and revenue-raising measures to plug a yawning
budget gap. As they review the alternatives, they should look first to
taxes that won’t further reinforce this negative trend.
Actually, the disparity between what the wealthiest families and
everyone else have to pay is even greater once federal itemized
deductions are included. Taxpayers may deduct state and local personal
income and property taxes when they pay their U.S. taxes.
Upper-income taxpayers are more likely to itemize and take advantage of these
deductions. Taking that into account, the lowest fifth of families pay
more than half again as much of their income in state and local taxes as
the top 1 percent do.
Sales and excise taxes are the main reason poor and middle-class
Ohioans pay a greater share of their income in state and local taxes
than the well-off. Naturally, low- and middle-income families spend more
of their pay than rich families, who are able to save more. Partly
because of that, the less affluent pay more of their incomes in sales and
excise taxes. The lowest fifth of the state’s families, which average just
$8,800 a year, pay 6.3 percent of their income in such taxes. For the top
1 percent, who average $660,200, that figure is just 1 percent.
Property taxes are also a smaller drain on the finances of those at the
top of the income spectrum.
Ohio’s graduated income tax makes up for much of the inequality
caused by sales, excise and property taxes. The poorest fifth of Ohio
families pay 1.7 percent of their income in personal income taxes,
compared to 3.9 percent for the middle fifth and 6.9 percent for the top 1
This leaves Ohio with a somewhat fairer tax system than the average
state. But rising sales taxes over the past decade have been moving us
in the opposite direction. That trend should be reversed. With the state
needing new revenue, it should take the opportunity to rebalance the tax
One place to start is with the corporate franchise tax, which is Ohio’s
corporate income tax. Once a major source of state revenue, it has
withered in recent years. Changes in state law that weakened the tax
and wide-scale tax avoidance by multistate companies have contributed
importantly to the decline.
Companies find legal ways around the tax. A common tactic involves
shifting income to subsidiaries in other states that will not be taxed as
heavily as Ohio affiliates would be. The Ohio Department of Taxation
estimates that the state would take in roughly another $200 million a
year under the tax if it adopted a rule followed in California and 15 other
states. That rule requires each company to report on its operations as a
combined entity, eliminating transactions between various subsidiaries.
Another step could be adding a temporary surtax to the state personal
income tax for the highest earners, or another bracket above the top one
that now begins at $200,000. On the other end of the scale, Ohio should
join the 17 states that provide an earned income tax credit for low- and
middle-income workers. These have made a difference elsewhere in
equalizing tax burdens.
More regressive taxes may be needed to balance the state budget by
the end of June and provide stable revenues in the future. But as the
governor and legislators wrestle with how to close the budget deficit,
they should keep in mind who is bearing the greatest burden in today’s
tax system. Perversely, it’s those who can least afford it.