Income Tax Progressivity in Ohio
Economic research shows that a high degree of income tax progressivity
Harms economic growth
Increases the variability of a state’s income tax revenue
In other words, a state with a highly progressive income tax code, such as Ohio's, will have lower economic growth and greater swings in income tax revenue than states with less progressive income tax systems.
In 2000, Ohioans paid $725.91 in state income taxes for every man,
woman, and child in the state, compared to the United States average of
$692.80. In terms of progressivity, by various measures, Ohio has
The sixth most progressive state income tax for single filers;
The nineteenth for married filers; and
The fifth when calculated as the difference between the top and bottom rate.
The study empirical examines the relationship between income tax progressivity and economic growth and finds that Ohio's highly progressive income tax has a strong, negative impact on economic growth.
In addition, progressivity increases the volatility of Ohio's income
tax revenue. For example, if Ohio's economic activity fell by 10
percent during a recession, the state’s income tax revenue would fall
by 12.2 percent.
Thus, Ohio's highly progressive income tax has helped sow the seeds of
the current state budget shortfall. To reduce the progressivity of the
Ohio income tax, thereby mitigating the negative effects of
progressivity on economic growth and tax revenue variability,
policymakers can
Compress the marginal tax rate structure by reducing the number of brackets or reducing the spread between the top and bottom tax rates.
Decrease the level of the standard deductions and personal exemptions.
Allow taxpayers to deduct federal income tax liability from their Ohio taxable income.
From the standpoint of economic growth, lowering and compressing tax rates are the preferred reforms.
