Policy Matters Ohio: A Step Toward Fiscal Balance? Options for Ohio’s Income Tax

In the spring of 2008, Ohio’s state government finds itself in familiar territory – facing a budget shortfall because of an inadequate revenue system and a slowing economy. Despite the worsening economic outlook, state policy makers refuse to consider revenue-raising alternatives and are committed to allowing a scheduled cut in income tax rates to take place in 2009.

Next year’s cut would be the fifth in a series of annual cuts started in 2005 that will reduce income taxes by approximately $2.2 billion next year when compared to original rates. The gains are skewed to the wealthy. The top 20 percent of Ohio families by income will receive $1.56 billion, or 70 percent, of the aggregate $2.22 billion annual reduction.

Now is the time to begin examining the state’s options for raising revenue, both to avert a deficit and to invest in needed priorities. Policy Matters Ohio worked with the Institute on Taxation and Economic Policy (ITEP), a Washington, D.C., based research institute with a sophisticated model of state and federal taxation systems, to review three possibilities: (1) freezing rates at 2008 levels, (2) restoring the original 7.5 percent top rate for the highest income families, and (3) and rolling back rates to 2007 levels.

We recommend moving forward with the first two options immediately. Combined, these options would preserve $817 million in income tax revenue in 2009. The top rate applies to less than two percent of all Ohio families, while all others would pay the same rates they do this year.

The third option, combined with a restoration of the 7.5 percent top rate, may be necessary if the state’s fiscal health worsens. These actions would increase income tax revenue by $1.16 billion over the expected level in calendar 2009. The vast majority of the additional revenue, 78 percent, or just above $900 million, would be paid by the top 20 percent of income earners.

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