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How Ohio’s income tax works - and how the House budget would change it

April 24, 2023

How Ohio’s income tax works - and how the House budget would change it

April 24, 2023

Guillermo Bervejillo & Zach Schiller

The proposed changes to the state’s personal income tax in the House substitute budget bill are another blow to Ohio’s only tax that is based on the ability to pay, weakening the public programs, institutions, and supports that make the state strong. Most of the proposed cut’s benefits will go to the wealthiest 20% of Ohioans. The suspension of inflation adjustment to tax brackets (known as “bracket indexing”) for the next two years means that many households will see a tax increase for that time because of House Bill 33. This also temporarily reduces the cost of the tax cut, which, in truth, will cost Ohio about $400 million per year in the long term. In this policy brief we summarize the proposed income tax changes and how they interact with the existing state personal income tax.

Ohio’s existing income tax

Under Ohio’s graduated income tax, the more you make, the more you pay. It’s the only state-level tax based on ability to pay, and even with it, low-income residents pay nearly twice as much of their income in overall state and local taxes as the richest do. Those who advocate a flat-rate income tax want to lower taxes for the rich, draining resources that are crucial for schools, libraries, local governments, and public services from mental health to children’s services.

The income tax is set up with a series of brackets, where the rate you pay increases on the income you make over each set amount. Right now, before any exemptions or credits, people with non-business income under $26,050 don’t pay income tax. Those with incomes of $26,051 pay a minimum of $360.69, and 2.765% on all their income over that. Once you make over $46,100, you pay a bit more — 3.226% — but only on the income over that threshold. You pay 3.688% on income over $92,150, and 3.99% on earnings over $115,300.

The House version of HB 33 would eliminate the bracket between $46,100 and $92,150 and reduce the rate on income between $26,051 and $92,150 to 2.75%. Leaving out credits and exemptions (we’ll get to that), the permanent tax cut in the bill means that:

  • Someone with income of $26,050 or less will see no change.
  • Someone earning $46,100 would see a tax reduction of $3.
  • Someone earning $62,000 — the median Ohio household income — would pay $63 less.
  • Starting at $98,600, the cut would amount to $238. Everyone with income over that amount would get that.[1]

It’s not quite that simple; taxpayers are eligible for exemptions and often credits that may reduce those numbers. Everyone gets a personal exemption worth $2,400 if their income is $40,000 or below, along with one for their spouse and each dependent. (The exemption is worth somewhat less at higher income levels.) That means that a family of three doesn’t start paying Ohio income tax until their income reaches $33,250. This further reduces the amounts of the tax cuts. For instance, a family of three with income of $62,000 would see just a $33 reduction.

Taxpayers can also be eligible for tax credits which reduce the amount they owe and — if those credits are refundable — can lead to a refund greater than the taxes paid at the end of the tax year. The state earned income tax credit (EITC) is a nonrefundable tax credit for low- and moderate-wage earners that is adjusted according to household size and income. The EITC smooths out most low-income households’ tax liability.

Who gets this tax cut?

The calculations get pretty complicated when you start adding in exemptions, deductions, credits, and the fact that not all forms of income are taxed the same. (See our work on the LLC loophole if you are interested.) So, we asked the Institute on Taxation and Economic Policy (ITEP) — a nonprofit with a sophisticated model of state and local taxation — to run some numbers for us. They found that more than half the value of the tax cut (50.7%) benefits the wealthiest 20% of Ohio households. This makes sense since you must make at least $98,600 get the full benefit of the cut — which puts you roughly in the top third of the state. In fact, 94.7% of the value of the tax cut will go to the top 40% of Ohio households. Only about 5.3% of the value of the cut will go to the bottom 60% of Ohioans.[2]

ITEP’s model shows that, on average, people making between $23,000 and $75,000 per year will see a small tax increase because of HB 33. Some people in that range will see a tax cut, but they will be the minority. This is because of the impact of the suspension of bracket indexing. (More on this below.) In short, this is not a middle-class tax cut; while some middle-income Ohioans will see small tax cuts, they are not the primary beneficiaries. Households in the poorest 20% of Ohio will, on average, see no change to their tax liability.

What is bracket indexing and why does it matter?

If your earnings grow with inflation, you might find yourself paying higher taxes even though you’re not making more money in real terms. To protect against that, the General Assembly has approved adjusting the tax brackets each year by inflation. So if you earned $44,000 in 2021 and your earnings grew to $46,000 in 2022, you didn’t find yourself paying higher taxes on some of that income; the bracket increased from $44,250 to $46,100. All of the brackets were adjusted this way and that is done every year.

However, a less-noticed element of the HB 33 tax proposal would suspend that annual inflation adjustment for the next two years. The impact of this is greater than you might think. Leaving aside exemptions and credits, let’s say an individual made $25,000 in 2022, but makes $27,000 in 2023: Without inflation indexing they’d go from paying no tax to paying $386. In fact, the Legislative Service Commission (LSC) has estimated that suspending this inflation adjustment will generate an additional $217 million in Fiscal Year 2023 and $361 million in Fiscal Year 2024. That means a sizeable number of Ohioans — including some not much above the official poverty level — will see tax increases despite the elimination of the one bracket and the reduction in the rate. That’s what keeps the size of the overall tax cut down over this two-year period to a total of $201 million, according to the LSC, though it will be worth more than $400 million annually after that.

[1] These figures assume that bracket thresholds would be indexed to inflation. We use a 7% GDP deflator to arrive at the following 2023 income tax brackets: $0-$27,850; $27,850-$49,350; $49,350-$98,600; $98,600-$123,350; >$123,350.

[2] All ITEP figures are assuming a 7% GDP deflator for 2023. However, the lack of inflation indexing is likely to have a larger impact as time goes by.


2023Guillermo BervejilloOhio Income TaxRevenue & BudgetTax PolicyZach Schiller

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