VOICES: A flat income tax won’t bring economic gains to Ohio

Ohio House Bill 1 would convert Ohio’s graduated income tax, which taxes residents based on their income, into a flat-rate tax. It would result in property-tax increases, cuts in property tax and state aid received by schools and local governments, and reduced state revenues that the bill does not pay for.

That trifecta of bad policy was made clear in an analysis by the Legislative Service Commission released last week. It should convince legislators to pronounce House Bill 1 dead on arrival.

We already know that the flat tax in HB 1 would be a handout to the richest Ohioans. A family making $50,000 would get a cut of $3, compared to one making $500,000, which would get $5,000. A family making under $30,000 would get nothing at all. The Institute on Taxation & Economic Policy, a nonprofit with a sophisticated model of state and local tax systems, found that 89% of the tax cuts would go to that fifth of taxpayers with incomes over $124,000, while 35% would go to the top 1% of Ohioans, who make over $617,000 annually.

ExploreTHE OTHER VIEW: A flat income tax won’t bring economic gains to Ohio

In addition to changing Ohio’s income tax into a 2.75% flat-rate tax, the bill contains a variety of changes to property taxes. These include ending state payments that currently pay for 10% of most residential property taxes (known as the 10% rollback), reducing assessment values, expanding the homestead exemption and making changes in another program under which the state pays 2.5% of property taxes owed by owner-occupants. LSC reviewed each of these changes and my organization, Policy Matters Ohio, has added up its fiscal estimates. While the interplay of these changes is complicated and effects will vary significantly for individual taxpayers and homeowners, the net impact in the aggregate is property-tax increases.

We figured the ongoing long-term effects after the initial phase-in period based on the LSC analysis. It found that HB 1 would mean:

  • Property tax increases of at least $600 million a year for residential and agricultural property owners, which result from changes in the bill and the operation of Ohio’s existing property tax limit, known as House Bill 920.
  • Reductions in property tax and state aid received by schools, local governments and libraries of over $500 million a year, though losses to schools would be partially offset by increases in aid through the foundation formula.
  • Some $780 million a year in net losses for the state that are not paid for in the bill. This takes into account $1.79 billion in reduced annual revenue for the General Revenue Fund because of the flat tax and additional expenses from paying for expansions of the homestead exemption, offset by $1.3 billion in reduced expenses by no longer covering the 10% rollback (LSC also said any indirect increase in revenues caused by the cuts likely would be small compared to the direct effects).
  • Reduced property taxes for business property owners of $157 million a year.

Homeowners would pay the bulk of the cost of eliminating the 10% rollback, while businesses that own property would see a tax cut. The bill includes an intention to keep local governments whole in the upcoming budget, but no specifics were provided, nor is any long-term aid promised.

A flat income tax won’t bring economic gains to Ohio. Nearby states with flat taxes have shown lower economic growth than Ohio, while those with higher growth, like Colorado and Utah, have higher rates than Ohio’s current top rate of 3.99%. Moreover, Ohio has had a flat tax, or no income tax at all, on business income for the last decade. Yet our employment has declined relative to the rest of the country, and hiring of new employees at newly formed businesses has stagnated.

While bill sponsor Rep. Adam Matthews (R-Lebanon) is expected to make changes, the flat tax at the heart of the bill provides Ohio’s wealthiest with thousands of dollars in tax cuts apiece. Meanwhile, the vast majority of Ohioans will see some combination of diminished public services and other tax increases to pay for this. That’s a bad trade-off, one that the General Assembly should reject.

Zach Schiller is the Research Director for Policy Matters Ohio.

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