New study: Ohio tax policy favors the rich over poor
Posted September 23, 2015 in Selected Press
A new study suggests Ohio tax policy is heavily in favor of the affluent, while hitting the poorest the hardest.
The state tax changes made in the past three years have given the top-earning 1 percent of Ohioans an average of $17,618 annual reduction in taxes, while the bottom fifth, who make less than $20,000 a year, are paying $17 more, according to a report published in August by Policy Matters Ohio. The non-profit and non-partisan state policy research institute is based in Cleveland and Columbus.
The major state tax changes during the Gov. John Kasich administration include a 10 percent income tax cut in 2013 and another 6.3 percent reduction approved in 2015, a state sales tax increase from 5.5 percent to 5.75 percent in 2013, and a tobacco tax increase to $1.60 a pack in 2015.
The windfall for those on the top of the money pyramid mostly comes from the income tax cuts. Ohio has a graduated income tax in which higher income is taxed at a higher rate. Since the cuts are made across the board (the tax rates in each income bracket are reduced by the same percentage), people at the top will see a greater reduction in both relative and absolute terms – bigger percentage and more dollars, said Zach Schiller, research director of Policy Matters Ohio.
“We fundamentally think that that’s bad news,” Schiller said. “That’s not good for most Ohioans. In fact, we need to move in the opposite direction; we need to be strengthening the income tax, not weakening it.”
Schiller said the bigger share of the state income taxes is now being paid by the lower and middle classes. In addition, people at the bottom are paying more of their income for those increased taxes.
“If you are making less than $20,000 a year, more than likely you are getting virtually nothing out of the tax cuts,” Schiller said, “The $4 annual tax cut on average to people making less than $20,000 – that’s chicken feed, not enough to matter.” (If you exclude the tobacco tax increase in the analysis, the bottom 20 percent on average gets an annual tax cut of $4, and the middle fifth gets an average cut of $122.)
The tax benefits are least visible in poverty-stricken areas, such as Athens and other counties in southeast Ohio.
In tax year 2013, of 20,831 taxpayers in Athens County, more than 40 percent had annual taxable incomes of less than $20,900, and about 70 percent earned less than $41,700 a year, according to Ohio Department of Taxation. At the other end of the spectrum, 5.5 percent were paid between $104,250 and $208,500. Only 1.3 percent took home more than $208,500 taxable incomes per year.
It’s only slightly better in the city of Athens. In the same year, 62.4 percent of 9,235 taxpayers had taxable incomes lower than $41,700. Over 10 percent had more than $10,000.
Tax Relief for Low-Income Citizens
The governor’s office says there’s a reason for this tax policy.
“At the same time the governor has worked to cut income tax rate, the governor has also been focused on reducing taxes for low-income Ohioans to help them move up the economic ladder,” Gov. Kasich’s press secretary Joe Andrews told The Athens NEWS.
In 2014, the personal and dependent exemption increased from $1,700 to $2,200 for Ohioans with taxable income less than $40,000 a year and from $1,700 to $1,950 for those with income between $40,000 and $80,000, according to Ohio Department of Taxation. That lowered taxable income for these residents.
In addition, Ohio has a low income tax credit that eliminates all income tax for individuals with $10,000 or less Ohio taxable income. In 2013, 1,175,341 individuals paid no tax as a result of that credit, said Gary Gudmundson, communications director for the Ohio Department of Taxation.
Ohio’s first Earned Income Tax Credit was created in 2013. It was equal to 5 percent of the federal credit, and was increased to 10 percent in 2014. It particularly benefits working families with children. As the table below shows, a single parent with two children will see a 66 percent deduction in their income tax from 2011 to 2016.
However, unlike the federal credit, Ohio’s Earned Income Tax Credit is not refundable. It cannot exceed what a taxpayer owes in income taxes, and the unused credit will expire before the next tax return. Additionally, for those earning more than $20,000, the credit cannot exceed half of what is owed in income tax.
Policy researchers said the tax benefits that the rich and the poor receive are not at all equal.
“It is overshadowed, almost overwhelmed by the income tax cuts that went to the most affluent,” said Schiller, research director at Policy Matters Ohio. “It is not as far-reaching as it needed to be.”
Tax Cuts and Economic Growth
Tax cuts have long been associated with economic growth and job creation and preservation. “It has been sold as economic stimulus that this will create more jobs, more companies will come to Ohio,” said Schiller.
Kasich Press Secretary Andrews agrees. “Cutting taxes to make Ohio more competitive to economic growth has been a priority for the governor. By creating a more jobs-friendly state, Ohioans have created 330,000 new private-sector jobs since 2011, and we are enjoying a decade-low unemployment rate.”
In fact, Ohio has not yet made up the jobs it lost during the last recession, according to U.S. Bureau of Labor Statistics.
Schiller said Ohio is one of the 14 states that still fall behind the pre-recession economy. He called the belief that cutting taxes will boost the economy a “fallacy.”
“If income tax is such a critical thing in job creation, you would think we would at least do well as the rest of the country, at least the average. We are not average. We are below average,” he said.
Income Tax Cut vs. Sales Tax Cut
Sales tax and income tax together usually make up more than two-thirds of the state revenue, said Jay Ryu, professor of public policy and administration at Ohio University. In fiscal year 2014, sales and use tax accounted for 44.4 percent of Ohio’s total revenue excluding federal aid, and individual income tax comprised 39 percent, according to Ohio Office of Budget and Management.
To make up the loss in income tax, Ohio lawmakers increased the state sales tax from 5.5 percent to 5.75 percent on Sept. 1, 2013.
Ryu noted that the sales tax is regressive, which means it imposes a greater burden on the poor than on the rich. Cutting the sales tax benefits people at the bottom, since they spend more of their income on items that include a sales tax.
Why, amid foundering economy and increasing inequity, wouldn’t lawmakers cut the sales tax instead of the income tax? Ryu said it’s all “politically driven.”
Firstly, the income tax cut is more visible than sale tax reduction. “People don’t feel the sales tax cut burden that much, while income tax cuts result in saving one big chunk of money at one time,” Ryu said.
Secondly, to please the affluent is to please the most active voters. “High-income owners are the most active participants in voting,” Ryu said. “If you cut income taxes for these guys, they will support whoever makes that cut.”
Original Article: http://www.athensnews.com/news/local/new-study-ohi...