The proposal, House Bill 1, would create a flat income tax rate of 2.75 percent. While the bill’s sponsor has said he plans to amend the bill, HB 1 would also cut corporate property taxes and increase residential/agricultural property taxes, while decreasing government funding for schools, parks, libraries and local governments, cleveland.com reported previously.
Since Ohio has been cutting income taxes for the better part of 20 years, now is as good a time as any to ask whether Ohio’s income tax cuts have benefitted Ohioans.
Tax reform is a politically charged issue, with conservatives saying lower income taxes help drive economic prosperity, and progressives saying tax cuts have functioned as handouts to the rich, while defunding crucial public services.
Despite those stark differences, both right- and left-leaning groups who spoke to cleveland.com said the impact of Ohio’s income tax cuts on the state economy overall throughout the past 20 years has been minimal.
“The theory behind it is that cutting these taxes will spur on extra growth and get extra investment,” said Jonathan Ernest, an assistant professor of economics at Case Western Reserve University’s Weatherhead School of Management. “You would expect after some number of years to start seeing growth, and we haven’t necessarily seen that.”
The effects of income tax cuts on Ohio’s economy are “not as clear-cut as people would like it to be,” said Greg Lawson, a research fellow for The Buckeye Institute, a libertarian-leaning think tank.
Part of the reason why is because shortly after the state legislature began reducing income tax rates in 2005, Ohio endured the Great Recession, which caused such economic devastation in Ohio that it washed out the more subtle economic effects of government policy, Lawson said.
Ohio further cut income taxes in 2019, reducing all income tax rates by 4 percent, but the economic devastation brought by COVID-19 also made that relatively subtle change in economic policy hard to observe.
Donovan O’Neil, who testified in favor of HB 1 on behalf of the libertarian group Americans for Prosperity- Ohio, also agreed economic changes caused by Ohio’s 20 years have been relatively small.
“What we’ve done is tweaked at the margins, but I think eliminating Ohio’s income tax or putting us on that path for the next 5-10 years (would be) putting a signal out there that we’re not just tweaking at the margins,” O’Neil told cleveland.com.
Tax cuts come with a cost. When the government makes less money through taxation, it typically must cut spending. Ohio’s tax cuts since 2005 have reduced state government revenue by an estimated $8 billion per year, according to a 2022 report from Policy Matters Ohio, a left-leaning think tank.
“State taxes themselves, I would argue, are not a huge portion of what determines economic growth and economic decline, in and of themselves,” said Guillermo Bervejillo, a state policy fellow at Policy Matters Ohio and author of the 2022 report.
While it may be unclear how income taxes have affected Ohio’s economy, it is clear who has benefitted. In 2021, Ohio cut income tax rates to 3.99 percent for the highest bracket of earners. That tax cut resulted in 73 percent of the economic benefit going to those who make more than $100,000 per year, according to a report from the Urban Institute.
HB 1 would save a taxpayer who makes $75,000 per year $140 in taxes, while someone who makes $500,000 would save $5,209, cleveland.com reported previously.
How is Ohio’s Economy Doing?
Sometimes it’s obvious how an economy is doing, but often statistics paint a complicated and varied picture of a state’s economic health. Both conservative and liberal groups cleveland.com spoke with agreed Ohio has been lagging in many key national averages, although they disagreed as to why.
To start, let’s use an imperfect, but unavoidable statistic: gross domestic product (GDP), which measures the size of Ohio’s economy overall.
The center-right Tax Foundation says GDP tends to increase as income taxes are cut. However, all that means is that Ohio has been cutting taxes while its economy has been growing.
That correlation, albeit a strong one, doesn’t prove Ohio’s tax cuts are driving economic growth.
Between 1997 to 2004, Ohio’s GDP increased 1.9 percent per year, while the national GDP increased 3.6 percent per year, according to inflation-adjusted data from the Bureau of Economic Analysis, a nonpartisan government agency that compiles economic statistics.
Between 2005, when Ohio began cutting income tax, and 2021, the most recent year available, Ohio’s GDP increased just under 1 percent per year, while national GDP increased by just under 2 percent per year, according to data from the bureau.
The Great Recession took a significant toll on Ohio’s GDP, which complicates this analysis. However, when 2007 to 2011 – the years in which Ohio’s GDP took the biggest hit — are factored out, the findings remain roughly the same. Between 2012 to 2021, Ohio’s GDP grew at a rate of 1.7 percent per year, while the national GDP grew at a yearly average rate of 2.3 percent, according to data from the bureau.
Lawson argues Ohio’s economic state would have been worse off if it weren’t for income tax cuts. Bervejillo argues the opposite, saying state income tax cuts hamstrung the state government from investing in programs that could have helped people out of poverty and rebounded the state’s economy.
GDP, while useful, does not account for changes in wages, poverty rate, employment rate, public services, new job creation, new business creation, etc.
So how is Ohio’s middle class doing? One way to look at that is to examine how the state’s median income has changed in the last 20-plus years.
In the late 1990s and early 2000s, Ohio’s median income was similar to that of the country as a whole, according to data from the U.S. Census.
But in the early 2000s, Ohioans’ median income diverged from the national average, a disparity that grew during the Great Recession.
At its most extreme, Ohio’s average median income from 2011-2013 was about $7,000 lower than the national average. Ohio had been closing that gap until the COVID-19 pandemic, when Ohio median income fell as national income continued to rise.
Ohio’s median income for 2019-2021, the most recent three-year average, was just under $64,981. The median income for the U.S. over the same time frame was $71,760, according to the Census data.
Median income can be useful for gauging how Ohio’s middle class is doing, but many people make less than that amount.
That said, let’s take a look at how Ohio’s poverty rate has varied in the last 20-some years.
In the early 2000s, Ohio’s poverty rate was slightly lower than the national average. But in the wake of the Great Recession, Ohio’s poverty rate rose above the national average, and has stayed above that since, even though both the national and state poverty rates have been decreasing in recent years, according to data from the U.S. Census.
“There’s very little debate that Ohio has declined in its position relative to the rest of the country,” Bervejillo said. “When the recessions have hit, Ohio dips pretty significantly below the national average, then takes a while to catch up.”
While it can be hard to measure the impact of Ohio’s income tax cuts on the economy overall, one area where the impact is more obvious is the state’s budget.
At first glance, it looks like Ohio’s total revenue (not counting federal grants) has soared in value despite the state income tax cuts, increasing from $19 billion in 2002 to $31 billion in 2021, according to data from the Legislative Service Commission, a nonpartisan government body that collects data and estimates the fiscal impact of legislation.
This figure would lead one to believe the tax cuts have paid for themselves and more. However, when adjusted for inflation, Ohio’s budget growth looks much less impressive.
Once adjusted to 2023 dollars, Ohio’s 2002 revenue was $32 billion, while its 2021 revenue was $33 billion, according to inflation-adjusted data from the Legislative Service Commission.
In other words, Ohio’s GDP grew 23 percent percent from 2002 to 2021, while the size of Ohio’s budget (not counting federal grants) increased 3.4 percent.
“The Ohio economy might be growing, but income tax, state revenue is pretty much stagnant over the past 20 years,” Bervejillo said.
How Can Ohio Recruit Businesses?
Lawson said income tax cuts alone are a necessary, but insufficient way to increase investment in Ohio. Other reforms, such as workforce development and regulation changes are needed to improve Ohio’s economy, he said.
“The bottom line is we’re creating a better environment for investment,” Lawson said.
Many lawmakers, particularly Republicans, point to states like Texas and Florida as examples of how they want their states to function: fiscally conservative, increasing population and successfully courting large employers.
However, Ohio has no equivalent to Florida’s 800-plus miles of coastline or Texas’ massive oil production, which recently exceeded that of Iraq and produces significant tax revenue for the state, Lawson said.
So, to sweeten the pot for companies looking for a state to relocate, Ohio needs a business environment that compensates for its lack of sunny weather and negative population trends, Lawson said.
Bervejillo – whose doctoral degree is in economic geography — disagrees, saying human and business migration is much more complicated than that, and few people uproot their lives simply to save a few hundred or even thousand dollars in taxes. Rather, what drives people to move is often better job opportunities and family, Bervejillo said.
“What we’ve done is defund communities in the off-chance we may bring in some money from the outside, some imaginary investor,” Bervejillo said.
While any state-to-state comparison must be done carefully, it’s worth noting Kansas cut income taxes in 2012, which both liberal and conservative groups later described as a “failure.” The income tax cuts were later repealed by the Republican-controlled state legislature. However, as conservative groups note, many states have cut taxes in recent years but have not shared Kansas’ disastrous experience.
Cash In, Cash Out
Ohio is in the middle of the pack when it comes to per capita spending by state governments, according to data from the Kaiser Family Foundation. Ohio spends $6,323 per person, which is lower than Pennsylvania, West Virginia and Kentucky, but higher than Indiana and Michigan, according to the data.
Florida spends the least, at just under $4,000 per capita. Lawson questioned whether Ohio’s public services were significantly better than other states, such as Georgia, Texas and South Carolina, that spend significantly less per person.
“There’s an assumption that if you’re spending more, you’re making an investment and things are going to automatically get better,” Lawson said. “It’s about how you’re spending the money and what you’re prioritizing.”
Backfire
Opponents of Ohio’s tax decreases over the last nearly 20 years argue the cuts have resulted in the opposite stated effect: more taxes for the middle class.
Low-income taxpayers are paying a larger percentage of their income now than in 2005, when Ohio began cutting income tax, while wealthier Ohioans are paying less in taxes, according to a 2022 analysis from Policy Matters Ohio.
As a result of tax changes since 2005, the bottom 20 percent of earners are paying $164 more per year in taxes, while the richest 1 percent are paying $50,716 less in taxes, according to the Policy Matters analysis.
The idea that a low-income person would pay a larger percent of his or her income in taxes than a wealthy person seems counterintuitive, as both the state and federal government charge high income earners at a higher percentage than low-income taxpayers.
There are several reasons why, according to Bervejillo and Policy Matters Ohio. Lower-income taxpayers spend a larger share of their income on consumer goods, meaning more of their income goes to sales tax; they’re also more likely to feel the impacts of Ohio’s 2005 corporate tax changes that pass along costs to consumers, Bervejillo said.
“When you get wealthy, you spend a little more, but it’s not in proportion to the extra amount that you’re getting per year,” Bervejillo said. “There’s only so many toilet paper rolls you’re going to use.”
Taxes on sales, gas, property, cigarettes and alcohol tend to cost low-income people a disproportionate amount of their income, and one of the ways governments attempt to make up for these regressive effects is by charging higher-income earners higher income tax, Ernest said.
“You lose that counterbalance when you move to a flat income tax,” Ernest said.
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