First Posted: 1/15/2015
COLUMBUS — In Ohio and across the country, lower-income citizens pay a higher percentage of their income in state taxes than the wealthier do, a new study has found.
The situation here is worse than in most states, according to the analysis of 2012 income data by the Institute on Taxation and Economic Policy, which ranked states based on how state and local taxes affect low- and middle-income families compared with the richest 1 percent.
The study, which covered tax changes in the states through 2014, found that under nearly every state tax system, wealthier families pay a smaller percentage of their income in taxes than the lowest 80 percent of earners do. It ranks Ohio 18th worst for inequality.
“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matt Gardner, executive director of the progressive research group. “ Upside-down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem.”
The study found that the top 1 percent of income earners in Ohio — those making more than $356,000 — spend 5.5 percent of their income on state and local taxes. Meanwhile, those in the middle 60 percent of income, earning $18,000 to $82,000, pay on average 10.2 percent.
Over the past decade in Ohio, Republican state legislators and governors have cut the state’s income-tax rates by about 30 percent while increasing the sales tax from 5 percent to 5.75 percent.
The Institute on Taxation looks at tax structures from an equality perspective. Others do it differently: Of the 10 worst states on the institute’s list for tax inequality, four are among the 10 best states in the conservative Tax Foundation’s ranking of tax climates for businesses.
States with more-progressive income-tax rates — where rates are higher on those who earn more — generally fare better under the institute’s analysis because they reduce tax inequality. But the Tax Foundation looks more favorably on states with a flat income tax, or none at all, arguing that it’s better for business growth.
The Institute on Taxation report shows that in Ohio, most of the bottom 80 percent of taxpayers pay 2 to 4 percent of their income in state income taxes, while the top 1 percent pays 4.3 percent.
But in sales tax, the top 1 percent of earners pay 1 percent of their family income, while most in the bottom 80 percent pay between 4 and 7 percent.
The study gives Ohio credit for a progressive income-tax structure that excludes groceries from the sales tax, contains increased personal exemptions and has a new Earned Income Tax Credit — although the impact of that credit is limited because it is not refundable, meaning that if it exceeds the tax owed, the taxpayer doesn’t receive the excess.
Rep. Jeff McClain, R-Upper Sandusky, chairman of the House Ways and Means Committee, said that with the Earned Income Tax Credit and other moves, lawmakers have worked to make the tax cuts fair for all.
“You’re always going to have some of that where the wealthier are going to pay less of a percentage, or some will say they’re not paying enough,” he said. “The wealthiest pay 75 percent of the tax. We want to make sure it’s fair, and everybody ought to pay something.”
Gov. John Kasich and GOP legislators are expected to act again this year to cut the state income tax, arguing it is vital to making Ohio attractive to businesses. In the past, Kasich, to offset such cuts, has proposed raising fracking and cigarette taxes, increasing the commercial activity tax and expanding the sales tax.
Democrats and progressive policy groups such as Policy Matters Ohio argue that those policies will continue to cut taxes that benefit wealthy Ohioans more.
“If the governor continues cutting the personal income tax, that will make our tax system more unequal,” said Wendy Patton, senior director of Policy Matters Ohio’s state fiscal project.
