Ohio income tax rates are lowest in 30 years

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Taxpayers filing last-minute returns today will be paying the lowest state income tax Ohio has seen in 30 years.

The rates that went into effect this year for last year’s earned income continue a downward trend and haven’t been lower since 1981 for people earning less than $80,000 per year, according to a Dayton Daily News analysis of Ohio Department of Taxation records.

While income tax rates have fallen, income tax collections have continued growing. Increased revenue from income tax collections is not directly caused by the falling rates, according to Richard Stock, University of Dayton’s Director of Business Research Group.

“Tax collections rise when incomes rise,” Stock said.

“Incomes increase when gross domestic product increases. Real GDP has been rising all through this period except at particular recessionary points ... so you would expect incomes and therefore tax collections to rise.”

Tax collections fell to a 10-year low in 2010, but rose by 11.8 percent in 2011.

Revenues generated from state income taxes nationwide were up 9.8 percent during the same period, according to a report the U.S. Census Bureau released last week.

Ohio raised $8.8 billion in income tax revenue in 2011, a significant increase from 2010. That 2011 figure accounted for 35 percent of the $25.2 billion collected from income, property, sales and other state taxes, according to the same report.

Rob Nichols, spokesman for Gov. John Kasich’s office, said that “the income tax is a hindrance to growth, job creation, and our ability to attract business from other states.”

Lowering personal income tax rates will infuse capital into the economy, Nichols said.

If Kasich’s tax proposal focused on “fracking” is approved, income tax rates may drop again. Kasich is proposing an across-the-board income tax cut for all Ohioans that would be financed through a tax on high-volume horizontal wells or “shale wells.”

The tax could generate as much as $500 million a year during peak production, said Budget Director Tim Keen, allowing the administration to reduce income taxes by 5 percent.

The individual income tax was introduced in 1972, while the first rate increase appeared a decade later in 1982 with the addition of two higher income brackets.

Ohio’s top income bracket was introduced in 1993 at 7.5 percent for people earning more than $200,000 per year. There are now nine state income brackets ranging from 0.587 percent to 5.925 percent. At the federal level, there are six brackets ranging from 10 percent to 35 percent.

Three of Ohio’s five neighbors have a single flat tax rate for all income: Pennsylvania at 3 percent, Indiana at 3.4 percent and Michigan at 4.35 percent. Kentucky and West Virginia both have graduated rates from 2 percent to 6 percent and from 3 percent to 6.5 percent, respectively.

From tax years 1987 through 2004, Ohio’s income tax rates stayed relatively stable, but rates have been steadily falling since 2005, when the state legislature authorized five annual across-the-board income tax rate reductions of 4.2 percent each.

In 2009, legislators postponed the fifth and final income tax cut for two years as an effort to fill a budget hole left open by a failed plan to add video slot machines at horse tracks.

As a result of the final reduction, Ohio’s tax year 2011 income tax rates are 21 percent lower than they were for 2004, the year before lawmakers approved the cuts.

In 2010, the state introduced its first-ever adjustment of the income tax brackets for inflation. That move saved Ohioans an estimated $49 million ($26 million for 2010 and $23 million for 2011) when compared to what they would have paid, according to the Ohio Department of Taxation.

This periodic adjustment of tax brackets, known as indexing, is to prevent people from being pushed into a higher tax bracket when their paychecks are only keeping up with inflation.

“Indexing is not very important at the margin in a period of low inflation, but is appropriate in order to keep government from capturing a larger share automatically,” UD’s Stock said.