The Wrong Tax
Posted February 07, 2005 in Op-Eds
Tax reform is in the air in Columbus. Gov. Bob Taft and Republican legislative leaders have called it their top priority. But disturbingly, proposals leaking out of the state capital take aim at the fairest tax in Ohio, the personal income tax.
Cutting the income tax is likely to make Ohio’s tax system much less equitable.
That’s because Ohio has a graduated income tax. The more you make – up to a point – the higher rate you pay. Income between $20,001 and $40,000 is taxed at 4.457 percent, for instance, while income over $200,000 is taxed at a 7.5 percent rate.
If the state were to cut rates across the board, richer Ohioans would reap, by far, the greatest benefits. This is clear from calculations made by the Institute on Taxation and Economic Policy, a Washington, D.C., nonprofit research group that has a computer model of the federal, state and local tax systems.
A 22 percent across-the-board cut would reduce state taxes for the top 1 percent of Ohio taxpayers – those making more than $274,300 a year – by an annual average of $8,464 apiece.
Members of this group, who make an average of $642,900 a year, would receive nearly a quarter of all the tax savings.
That’s considerably more than all Ohio taxpayers making less than $43,400 – the bottom 60 percent of all those in the state – would receive. And those who make less than $9,700 – the bottom 20 percent of taxpayers by income – would save an average of just $12 a year.
Why is it that an across-the-board tax cut would not affect all taxpayers in the same way?
Because under Ohio’s graduated income tax, higher-income taxpayers pay at steeper rates. This makes sense. Wealthier people can more easily afford to pay, and other taxes are weighted against poor- and middle-income families.
ITEP’s calculations also showed that a 22 percent cut would cost the state $2 billion in annual revenue. This would roughly double the deficit expected over the next two years.
Proposals in circulation would pay for an income-tax cut by extending the penny increase in the sales tax now set to expire on June 30. That would not pay for an income-tax cut of this size. But even if it would, the idea is one that should send legislators running in the other direction.
Lower- and middle-income Ohioans already pay a larger share of their incomes on state and local taxes than upper-income taxpayers. The sales tax, in particular, falls more heavily on those who make $20,000, or $40,000, a year than those who make $240,000.
That’s because upper-income taxpayers don’t spend as much of their income, and what they do spend is less likely to be covered by the sales tax.
As a result, cutting income-tax rates and paying for it with a sales tax boost would amount to pick-pocketing poor and middle-income Ohioans and giving the proceeds to the highest-income earners in the state. It would be Robin Hood in reverse.
Ohio can ill afford to slash one of its major revenue sources when state aid to libraries and municipalities is likely to be chopped, crucial Medicaid services are threatened, college costs are increasingly unaffordable, and we have yet to fix our unconstitutional system for school funding.
Those who support an income-tax cut say it will help our economy. But cutting the income tax by 22 percent would result in $284 million – nearly one in every seven dollars the state loses – going to the federal government, not Ohio taxpayers. That’s because the cut in state income taxes would leave taxpayers with less to deduct on their federal tax forms, forcing them to pay higher U.S. taxes.
There is little evidence to show that income-tax rates are impeding economic development.
There is plenty of evidence, however, showing that the way states grow their economies is by having skilled, educated workforces.
Investing in our workforce should be the focus of Ohio’s economic development efforts, ahead of reverse Robin Hood schemes that would undercut our ability to fund education from preschool through college.