The following article was originally published in the Ohio Capital Journal and published on News5Cleveland.com under a content-sharing agreement.
It sounds fair. If everybody paid income taxes at the same rate, the rich would pay more because of their higher incomes and the poor would pay less because they make less in the first place.
But an Ohio proposal to enact such a “flat” state income tax ignores a host of other taxes, said a progressive public policy think tank. And the way that the law is written would only complicate the state’s school-funding woes, take money from libraries, and increase property taxes for farmers and homeowners, it added.
“One of the myths that we have to dispel is that flat taxes make things fair,” said Guillermo Bervejillo, a state policy fellow at Policy Matters Ohio. “It’s quite the opposite. One of the things people forget when they talk about income taxes is that there’s a whole array of state taxes.”
Bervejillo was speaking in reference to House Bill 1, which, as the bill number implies, is a top priority of the Ohio House’s Republican leadership. A spokesperson for that leadership didn’t respond to questions about the many criticisms that Policy Matters made of the bill.
One is that many economists have long argued that so-called “flat” income taxes add to the overall tax burden shouldered by the poor and act as yet another means of lightning that of the wealthy.
“There’s use taxes, sales taxes, excise taxes, taxes that are generally focused around consumption and use,” Bervejillo said.
Graphic from the Center on Budget and Policy Priorities. He explained that those kinds of taxes are the same for everybody, no matter her or his income. Buy a $100 pair of shoes in Ohio and you pay $5.75 in state sales tax regardless of whether you make $100 in a minute or in a whole day of work.
“You can only buy so much toilet paper,” Bervejillo said, explaining why sales and excise taxes fall more heavily on the poor. “You can only drive so many miles.”
The cumulative impact of those taxes is that the poor pay much more as a percentage of their income in state and local taxes than do the rich.
“On average, the lowest-income 20% of taxpayers face a state and local tax rate more than 50% higher than the top 1% of households,” the Institute on Taxation and Economic Policy said in a report, Who Pays? “The nationwide average effective state and local tax rate is 11.4% for the lowest-income 20% of individuals and families, 9.9% for the middle 20 percent, and 7.4 percent for the top 1%.”
Federal and state income taxes are the few exceptions that were originally structured to be “progressive.” In other words, they were intended to fall most heavily on those with the greatest ability to pay.
And it’s true that if you take those and all other taxes into account, the richest Americans pay a bigger portion of their incomes out in taxes than poorer Americans. But the spread isn’t very wide.
In 2019, the poorest 20% of Americans paid 20.2% of their incomes in taxes, while the richest 1% paid 33.7%, the Institute on Taxation and Economic Policy reported.
But in Ohio if you take just state and local taxes into account, the script is flipped. In 2018, the poorest 20% paid almost twice as much of their income in such taxes — 12.3% — as the richest 1%, who paid just 6.5% of their lavish incomes in state and local taxes, the institute reported.
And if Ohio were to enact a flat income tax, it would come on the heels of other measures in which the state has foregone large sources of revenue largely to the benefit of the wealthy.
Ohio is giving up about $1 billion a year on a tax break for limited liability corporations. It was sold as a way to incentivize mom-and-pop businesses, but a 2017 analysis by the Ohio Legislative Service Commission found that as much as $450 million of that annual benefit was going to the highest 0.5% of Ohio wage earners.
Meanwhile, there’s been no evidence that the cut improved Ohio’s jobs picture. It was 39th among states for job growth in February 2003 — well before the LLC tax cut was implemented, according to data compiled by Arizona State University’s Seidman Institute. By last month, Ohio ranked 46th in year-over-year job growth.
And former Gov. John Kasich created JobsOhio by diverting funds from the state liquor monopoly. It’s spent more than $1 billion on things like incentives for wealthy businesses to locate to Ohio, but the agency has struggled to show that those expenditures have made much of a difference to the state’s jobs picture.
But aside from fairness, Policy Matters raised another objection to HB 1 — it’s not paid for. Working from a fiscal analysis of the bill by the Legislative Services Commission, the group found that after the initial phase-in:
- Property taxes on farmers and homeowners would increase at least $600 million a year because of “changes in the bill and the operation of Ohio’s existing property tax limit, known as House Bill 920.”
- Schools, libraries and local governments would lose hundreds of millions of dollars a year.
- There would be $780 million in annual net losses to the state that are not paid for in the bill.
Bervejillo said it’s not hard to understand why pain would spread to large swaths of Ohioans from the flat-tax proposal.
“At the end of the day, there’s only two things you can do when you cut taxes on the wealthy,” he said. “You can either cut services — and who depends more on services than low-income people? Or you increase sales and use taxes and gas taxes and cigarette taxes that fall disproportionately on low-income and working-class Ohioans.”
