The savings will be larger for wealthier Ohioans — who also pay a much larger share of income taxes — and the number of low-income Ohioans who will pay no taxes will increase.
Proponents of the tax cut say it’s a responsible response to the state’s budget surplus — putting money back into the pockets of hard-working Ohioans. And it’s a step toward flattening and simplifying the state’s tax code.
“The only way we can eventually cut spending … is to starve the beast, and to starve the beast we have to cut taxes,” said state Sen. Kristina Roegner, R-Hudson.
But critics say it disproportionally benefits the rich — one study suggests the wealthiest 1% of Ohioans could each save $5,400 a year — and that money would be better invested in programs to help low-income people.
“While we continue to give away tax breaks to the wealthy, we could be funding better things like child care,” said state Rep. Erica Crawley, D-Columbus.
The Legislative Service Commission estimates the cuts will cost the state roughly $1.6 billion over the next two years. Lawmakers were able to cut taxes while increasing state spending, however, because the state’s coffers are bulging in response to last year’s spending reductions and a surge of federal stimulus during the pandemic.
“Are we mortgaging the short term to create major problems in a deficit?” posed state Sen. Bob Hackett, R-London, who represents Clark and Greene counties. “I totally support the budget, but I worry a little about the next five years of what we may be going through with inflationary pressure on that scenario.”
By the numbers
The state income tax cuts, folded into the two-year budget signed by Gov. Mike DeWine on Wednesday, are 3% for most Ohioans.
The Ohio Department of Taxation has not released an analysis of exactly how it will work. But a Dayton Daily News analysis of state tax data provides some indication of the dollar amounts involved and people affected.
The tax cut alters the lowest tax bracket so those with a taxable income below $25,000 will not pay state income taxes. The minimum was $22,150 in tax year 2020.
There were 232,242 filers in the seven-county region of Montgomery, Greene, Butler, Clark, Warren, Miami and Champaign counties with an adjusted income less than $25,000 in tax year 2019, the most recent data available. That included 43,268 filers with incomes between $20,000 and $25,000 who had a combined tax liability of $1.4 million that year.
For those who will pay taxes, lawmakers cut the tax rate by 3%. In tax year 2020, a filer with a taxable income of $50,000 (taxed at 3.326%), had a tax liability of $1,137. Three percent of that is roughly $34.
In the seven-county region, there were 121,324 filers in tax year 2019 with adjusted gross incomes between $25,000 and $40,000; 193,988 filers with adjusted incomes between $40,000 and $80,000; and 57,444 with an adjusted gross income between $80,000 and $100,000.
These taxpayers had a combined tax burden of $335.6 million.
The biggest state income tax cuts go to the highest earners. Lawmakers eliminated the highest tax bracket for people who make over $221,300 (taxed at 4.797%) and will tax them at the same rate as those who make over $110,650. It sets the state tax rate for this group at 3.99%.
In tax year 2020, the tax liability for a taxable income of $250,000 was $9,519. A 3% tax cut (what most Ohioans will get) would save about $285. But reducing the rate to 3.99% would bring the savings to $837.
There were 80,264 area filers with an adjusted gross income of $100,000 to $150,000 in tax year 2019; and 63,110 with an income of more than $150,000. The tax liability of those who made more than $150,000 was $545 million.
Reaction from left, right
The left-leaning group Policy Matters Ohio says its analysis found almost half of the tax cut will go exclusively to affluent taxpayers — the top 1% of earners will each see average savings of more than $5,000.
“Most taxpayers are not going to see a significant benefit from this, while a small percent of taxpayers are going to see a significant percent,” Policy Matters research director Zach Schiller said.
“It is ironic to me that, in effect, we are doing these tax cuts using the economic growth that was no small measure the result of federal aid,” he said.
Policy Matters says the money would be better spent on things such as public schools, expanding access to child care, and an earned income tax credit to give tax benefits to lower income Ohioans.
Greg Lawson, research fellow at the conservative Buckeye Institute, said it makes sense that top earners see the biggest break, since they pay the most income taxes.
“Folks who make more money in a progressive tax system inherently pay more money,” he said.
He noted that state lawmakers have steadily increased the number of low-income people who pay no taxes. The increase to $25,000 is more than twice the bottom threshold of $10,850 in 2018.
“At the end of the day you’ve dropped a lot of Ohioans off the tax rolls who pay no (state) income tax,” Lawson said.
A 16-year trend
Ultimately, disagreements over the tax cuts are part of a decade-plus debate about income taxes in Ohio.
Lawmakers have steadily reduced the number of tax brackets from nine with a top rate of 7.185% in 2005 to four with a top rate of 3.99% now. Many conservatives favor relying more on sales taxes than income taxes.
Liberals argue that low-income people pay a larger percentage of their income on sales taxes.
“We have had 16 years of these tax cuts. If it was going to appreciably improve Ohio’s standing, it certainly would have by now,” Schiller said.
This and other tax cuts in the budget signed by DeWine last week totaled $2 billion over the next two years.
“This is a balanced budget, it invests in kids, education, job training, infrastructure, our police and public safety, and we still have enough of a surplus to provide a tax cut for the people of Ohio,” said Lt. Gov. Jon Husted after the bill was signed.
“With the passage of this budget, it provides new momentum as Ohio emerges as the go-to state in the Midwest for people to live, work, invest, and play.”
