A Potential Boon for Ohio Taxpayers
A new bill introduced last month by Ohio legislators could soon make the Buckeye State the eighth in the nation with no income tax. The bill, known as SB 327, would gradually phase out Ohio’s non-business income tax over the next 10 years, with a planned 10% reduction annually. Legislators hope the bill will make Ohio more competitive with other low tax states like Tennessee and Texas that have each recently experienced robust economic growth. In addition, legislators believe that by eliminating these taxes, Ohio will attract new businesses and workers, as well as reduce the existing tax burden on residents.
However, the bill is likely to garner opposition from some legislators who fear that eliminating the tax could disproportionally harm low-income residents and decrease state revenue. They argue that eliminating state income taxes benefits one group of taxpayers at the expense of the other. But these fears are misplaced and underestimate the positive benefits that would come from eliminating the tax.
For instance, while it is true that upper class Ohioans would benefit from not having to pay a state income tax, the same is true for people of all income levels, including those who are middle and low income. Even for those individuals who don’t pay a state income tax, such as residents who make under $25,000, eliminating the tax for others in no way harms their wellbeing. Ohioans paying less taxes would have more disposable income to spend on the goods and services of their choice. In other words, it is not a zero-sum game.
While it may be argued that ending state income taxes will decrease state revenue, which could result in cuts to services, there is little evidence to suggest this is the case.
In fact, almost all states, regardless of tax policy, have seen their budgets continue to grow over the course of the last several decades, the pandemic being a noticeable exception. This has corresponded with increased levels of expenditure on government services. Even low tax states like Florida and Tennessee have managed to expand their tax bases by attracting new residents. Research suggests that people prefer to live in places with a low cost of living.
For example, most experts recognize Florida as a low tax state because of its low per capita tax level. However, the state is also set to collect nearly $3.29 billion more in general revenue this year than was previously expected. Much of this can be attributed to a favorable tax environment that has resulted in robust population growth and a net annual influx of people from other states. This is a pattern actually observable in national population shifts and cross border migration.
According to recent census data, the fastest growing states in the country were in the south, mountain west, and sun belt. The majority of these states have low tax burdens, and some forgo income taxes entirely. In the Tax Foundation’s 2022 Business Tax Climate Index, 7 out of 10 states with the best tax climate were states with no state income taxes. These include Wyoming, South Dakota, Alaska, Florida, Nevada, Tennessee, and New Hampshire, which levies taxes on interest and dividend income but not wage or salary.
In contrast, many of the slowest growing states, or states that lost population through outward migration, are states with some of the heaviest tax burdens. For instance, California, New Jersey, and New York all gained population but at a fraction of the speed that low tax states did. Others like Illinois actually lost population.
Therefore, all of the best evidence seems to indicate that should Ohio choose to end its’ income tax, not only would taxpayers save money, but the state may actually increase revenue collection over the long term.
However, even if this were not the case, Ohio is perfectly capable of finding alternative methods of generating revenue. In addition, there is no reason why Ohio would need resort to a more regressive form of taxation like increasing the state sales tax. A much better option would be to save money by cutting inefficiencies and government waste. This should be Ohio’s first order of business.
Ohio legislators should not be afraid to pass SB 327. Doing so will reduce the tax burden on residents during a period of economic uncertainty and incentivize others to move to the state. It may also help make Ohio an economic leader and an example for other states to follow.
Nate Scherer is a Policy Analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us on www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.
