Some middle-income households will see an increase

Update (Aug. 17, 2023): For more on tax changes included in the final budget, see this factsheet detailing changes to the income tax and this one on the Commercial Activities Tax.

The Ohio Senate has voted to weaken the state’s fiscal foundations in order to hand out billions of dollars to wealthy households. The changes to the state’s personal income taxes, currently included in the Senate’s version of the budget bill, will disproportionately benefit the rich, they will lead to temporary tax increases on some middle-income households, they will do nothing for many low-income Ohioans, and they will undermine the state’s capacity to invest in critical public institutions. The Senate’s budget bill outdoes the income tax changes proposed by the House and ensures even more handouts to the wealthy. We urge legislators and residents to reject the proposed income tax changes. We should direct our collective resources to the long-term prosperity of Ohio’s diverse communities rather than the short-term gain of the rich.

The budget bill abolishes two income tax brackets, reduces the rates of the remaining brackets, suspends inflation adjustment for those brackets (and for exemptions), and uses the revenue derived from that suspension to slowly do away with the taxation of households’ first $26,050 of income. Put simply, it is another example of the tax cutting policies that undermine economic prosperity for the benefit of the wealthy few. The changes would slash state revenues by about $1 billion per year from now into perpetuity, adding to the $8 billion per year lost from previous tax cuts and the $11 billion per year handed out in tax breaks. This trend undermines the state’s capacity to fund the critical public institutions that thriving communities are built on.

Ohio’s personal income tax is the only state-level tax that is based on a person’s ability to pay. Households with non-business income below $26,050 are exempt from paying income tax. Leaving aside exemptions and credits, those earning $26,051 or more pay a minimum of $360.69: 1.385% on their income below $26,050, plus 2.765% on the amount exceeding that threshold. Incomes above that are taxed according to the brackets in the table below. These numbers vary according to family size and other circumstances.

Even with this system, low-income residents — who contribute disproportionately in other state and local taxes — end up paying almost twice as much of their income in overall state and local taxes than the wealthiest Ohioans. The Senate’s income tax changes would skew this situation even more in favor of the wealthy few.

The Senate's version of the operating budget condenses the income tax brackets and reduces the rates on the remaining brackets. The bill phases in the tax changes in 2023 and fully implements the new brackets and rates in tax year 2024. But that is not all. Typically, the thresholds of the brackets are adjusted for inflation to ensure that no one is penalized for the simple fact that their income has risen with price levels. The suspension of this inflation adjustment—known as bracket indexing—will effectively increase taxes on all taxpayers. In the case of some low- to middle-income households, the suspension of bracket indexing will outweigh their share of the tax cuts leading to a temporary net tax increase.

In the coming years, the bottom half of Ohio households will see either a small tax increase or no change at all from these so-called tax cuts. A family of three making an annual income of $40,000 would likely see a tax increase of about $50 dollars while a family of three making $200,000 would see a tax cut of about $533. A family of three making Ohio’s median household income, $62,000, would see a tax increase of about $26. Critically, large portions of the state have median incomes below the state’s average figure and would be particularly disadvantaged by the budget bill.

The map below shows that in most counties a family of three making their county’s median income would see a tax increase as a result of the Senate’s budget bill. This is true in 72 of Ohio’s 88 counties, including all of Southeast Ohio. A family of three with their county’s typical income level would receive a tax cut in only 16 of 88 counties, several of which are affluent suburban counties outside of the state’s major cities.

In the long run, the revenues recouped by penalizing residents for inflation will be used to gradually reduce the initial minimum amount paid by taxpayers (i.e., the rate on the first $26,050 of income). However, that reduction could take many years, since it depends on the rate of inflation. During that time some households will be pushed into the next income tax bracket and see disproportionate tax increases. These cuts begin in the next biennium, tax year 2025, and, unlike most income tax cuts proposed by the General Assembly, would be relatively equitably distributed among existing taxpayers. That said, about a quarter of Ohio households, those whose incomes are not subject to the personal income tax, would get nothing from this policy.

According to figures provided by the Institute on Taxation and Economic Policy (ITEP) — a nonprofit with a sophisticated model of state and local taxation — the benefits of this cut will be disproportionately reaped by Ohio’s wealthiest households. ITEP found that 86.4% of the value of the tax cut in tax year 2024 will go to the wealthiest 20% of Ohio households, who make at least $124,000 a year. This makes sense since only the wealthy receive the full benefit of the compression of both income tax brackets. In fact, 99.1% of the value of the tax cut will go to the top 40% of Ohio households.

ITEP’s numbers confirm that millions of Ohioans — 60% of households — will, on average, see a tax increase or no change at all in tax year 2024. The top 1% of Ohioans, with an average income of nearly $1.6 million per year, will see an average tax cut of $4,370. In the long term, tax increases will be gradually zeroed out by the reduction in the rate of taxation on the first $26,050. Nevertheless, ITEP estimates that, even then, the majority of the value of the fully phased-in tax cut — 56.5% — will go to the wealthiest 20% of Ohio households. 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 lowest-income 20% of Ohio will, on average, see no change to their tax liability.

Meanwhile, the loss of $1 billion in state revenues per year will threaten the critical public institutions that support Ohio’s communities. Efforts to make school funding fair, to expand workforce development, to strengthen the state’s caregiving services, to clean our waters, and many more will teeter on an ever-shrinking fiscal foundation. In fact, the Senate bill slashes food aid, Medicaid coverage for children, publicly funded child care, and other services from levels approved in the House budget bill. When the next recession arrives, the income-tax cuts will deepen the dip in revenues and further endanger public services.

At Policy Matters Ohio, we have proposed a variety of revenue options to set the foundations for a thriving Ohio. For example, it is time to ensure that the wealthy pay their fair share: our polling shows that over 70% of likely Ohio voters would support an increase of tax rates on very high incomes. The Senate’s income tax changes are an urgent threat to Ohio’s long-term vitality. They should be rejected.

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