Poor hit hardest by state and local taxes
Posted January 14, 2015 in Selected Press
Ohio ranks 18th among states where low- and middle-income taxpayers pay larger share of their income in state and local taxes than the state’s most affluent residents, according to a study released Wednesday by Policy Matters Ohio.
The poorest fifth of Ohio households earning less than $18,000 a year paid an average of 11.7 percent of their income in state and local income, property, sales and excise taxes in 2012, according to the study produced by the Institute on Taxation and Economic Policy. By contrast, the top 1 percent of non-elderly Ohio families earning at least $356,000 annually paid 7 percent of their income, on average, in state and local taxes.
The disparity is likely even greater when you consider that upper-income taxpayers often subtract state and local taxes from their federal taxes as itemized deductions.
Taking such deductions into account, the richest 1 percent of non-elderly Ohio families pay less than half as much of their income in state and local taxes as the lowest fifth — 5.5 percent versus 11.7 percent, according to the report.
“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matt Gardner, executive director of ITEP. “Upside down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem.”
Wendy Patton, senior director of Policy Matters Ohio’s state fiscal project, said the new study underscores the need for a more equitable tax system in Ohio and argued against across-the-board income tax cuts supported by Gov. John Kasich that she said would only promote continued income inequality by helping Ohio’s richest residents at the expense of everyone else.
“The Ohio income tax is critical to a fair tax system and one that pays for education, health and other key services,” Patton said. “Attempts to weaken it will either redistribute income from the poor and the middle class to the rich, or cut needed public services.”
Gov. Kasich has already pushed down income tax rates and lowered the top rate below 5 percent, and he’s widely expected to push for further cuts to the income tax in his next budget bill.
But Gov. Kasich will have to find a way to pay for the tax cuts, which could mean higher taxes on such items such as gasoline and cigarettes, which low-income families spend a larger share of their incomes on than wealthier households. Ohio has already raised the sales tax from 5.5 percent to 5.75 percent.
State excise taxes on items such as gasoline, cigarettes and beer take about 1.6 percent of the income of the poorest families, 0.8 percent of the income of middle-income families, and just 0.1 percent of the income of top earners, according to a 2013 study from ITEP.
Overall, the bottom fifth of taxpayers nationwide paid 12.3 percent of their incomes, on average, in state and local taxes in 2011, according to ITEP, well above the 7.9 percent average rate that the top 1 percent of households paid.
Ohio has taken steps to reduce the tax burden on low-income households by expanding low-income tax credits for the working poor. But increasing consumption taxes to support income tax cuts could wipe out those benefits while the poorest taxpayers continue to pay a higher effective tax rate than any other income group.
“State policymakers shouldn’t wring their hands or ignore the problem,” Patton said. “They should thoroughly explore and enact tax reform policies that will make their tax systems fairer.”
Greg Lawson, a public policy analyst with the Buckeye Institute for Public Policy Solutions, said the focus on tax policy to reduce income inequality is misguided.
“They (Policy Matters) are hitting on the same old issue that this is all about income inequality, and that we’re going to be able to solve inequality through the tax code,” Lawson said. “You’re going to solve inequality through pro-growth policies, and if that means cutting a particular tax because it promotes growth that’s what we think is essential to improve things.”
U.S. Census data shows that states with no income taxes — such as Texas and Florida — have shown the biggest boost in population and jobs, according to Lawson, and cities and states with low-tax environments have been among the best at stimulating small business growth and lowering unemployment.
“Trying to get rid of the income tax over time will be better for Ohio’s economy in the long run,” Lawson said. “What we need to do is to make Ohio’s tax code better so we can get the jobs and get incomes up and running so that people will have a better life here, rather than trying to figure out how to parcel things out differently.”
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