Driven by the need to offset a substantial gas tax increase beginning July 1, Ohio lawmakers are considering several income tax proposals that would cut personal income tax rates for Ohio taxpayers. The new hikes increase Ohio’s tax on gas by 10.5 cents a gallon and the tax on diesel fuel by 19 cents. Unfortunately, both tax increases will have a negative effect on Ohio drivers and the Buckeye State economy as a whole.
Many economists consider levies on income the most destructive form of taxation because they stifle economic production, innovation, and risk-taking—the primary drivers of economic growth. On the other hand, lowering personal and corporate income taxes typically improves a state’s economy while generating new jobs.
The ideal reform for state income taxes would be to eliminate them altogether. In states where this is not feasible, legislators should strive for a tax system that is flat, not progressive, with as few tax brackets as possible. One model states can follow, which Ohio is now pursuing, is a tax reform plan using an income tax cut to balance out a previous tax hike elsewhere.
There are two main income tax cut proposals being considered, with both the Ohio House and Senate proposing tax reform packages. The House proposal would eliminate state income taxes entirely for anyone with taxable income at $22,250 or below and cut taxes for all other brackets by 6.6 percent. The House plan would also reduce the top income-tax rate from 5 percent to 4.67 percent on income above $222,200. The Senate plan would reduce rates further, cutting rates across the board by 8 percent and eliminate the state’s two lowest tax brackets.
Both bills would also address the current tax break that allows some Ohio business owners to treat portions of their business income as personal income. Currently, Ohioans are allowed to pay no taxes on the first $250,000 of business income filed as a limited liability corporation or other pass-through entity; the remaining income incurs a reduced tax rate of 3 percent. The House plan would reduce this break to the first $100,000 and eliminate the reduced tax rate on the remaining income. The Senate plan would maintain the $250,000 threshold. However, it would eliminate the reduced rate for incomes above this level.
The income tax cuts in both plans would encourage economic development by attracting new businesses and investors to Ohio. Conversely, maintaining high income and business taxes would have the opposite effect. According to the Americans for Tax Reform Foundation, data show “each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.”
Ohio House members are also considering a bill, Substitute House Bill 166, which would apply a 17 percent wholesale tax on e-cigarette products, the same excise tax rate that is currently imposed on other tobacco products. Imposing excise taxes on vaping products removes a prime economic incentive for smokers to improve their health by switching to e-cigarettes. The American Association of Public Health Physicians has concluded e-cigarettes “could save the lives of 4 million of the 8 million current adult American smokers who will otherwise die of a tobacco-related illness over the next 20 years.” The New England Journal of Medicine found the use of e-cigarettes to be “twice as effective” as nicotine replacement therapy.
Income taxes are antithetical to economic growth. They discourage capital formation, innovation, and job creation. Meanwhile, cutting income taxes would boost Ohio’s economy by leaving more money in the pockets of Buckeye State residents to spend, save, and invest.
The following articles examine income tax reform in greater detail.
How to Grow Ohio’s Economy: Return the Budget Surplus to Taxpayers
https://www.buckeyeinstitute.org/library/docLib/2019-05-20-How-to-Grow-Ohio-s-Economy-Return-the-Budget-Surplus-to-Taxpayers-policy-brief.pdf
In this policy brief, The Buckeye Institute’s Economic Research Center found that returning $658 million to taxpayers—through permanent lower taxes— would lead to 6,600 more jobs annually.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Rich States, Poor States
https://www.alec.org/publication/rich-states-poor-states-11th-edition/
The 11th edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the negative effects of high income taxes.
Economic and Revenue Effects of Changes in the Income Tax Rate
https://taxfoundation.org/economic-and-revenue-effects-changes-income-tax-rate/
Erik Cederwall of the Tax Foundation examines the effects of income tax changes on economic outputs and tax revenue. He finds that changes to a state’s top tax bracket create more significant economic impacts than cuts to the lowest bracket.
State Budget Reform Toolkit
https://heartland.org/publications-resources/publications/state-budget-reform-toolkit?source=policybot
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Balancing State Budgets the Smart Way
http://taxfoundation.org/article/balancing-state-budgets-smart-way
Joseph Henchman of the Tax Foundation examines an array of options states can use to remedy both short-term and long-term fiscal woes and put their budgets back on sounder legal footing.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact the government relations team at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
