Brief Summary of Ohio State Income Tax Changes 1972-2021

Ohio’s state income tax on personal income was established in 1971 to be effective on January 1, 1972. The Ohio income tax was designed with a “progressive” rate structure. This means that the tax rate increases as income increases. Economists regard a progressive rate structure as more equitable than a structure where all taxpayers pay the same rate (this is often referred to as a “flat rate” income tax). Furthermore, Ohio’s state sales tax is considered by economists to be “regressive” despite its uniform rate because lower income persons typically spend a greater proportion of their income on taxable goods and therefore will pay a greater proportion of their income in sales tax. As a result, the personal income tax is the largest driver of equity in Ohio’s state tax structure.

Ohio’s income tax has undergone a host of changes since its introduction in 1972. The original rates and six income brackets were unchanged from 1972-1981; however, income tax rates were increased three times from 1982-1984 in the aftermath of the severe recession in the early 1980s and two additional rate brackets were added at higher income levels (incomes higher than $80,000). In 1993 a ninth income bracket for those with income over $200,000 was added. Additionally, Ohio’s income tax rates have been permanently reduced eight times since 1985 (15 times if you count each of the number of yearly reductions as some of the decreases were phased in over multiple years), as well as five temporary income tax cuts which were implemented each year from 1996-2000. As a result of these repeated reductions, Ohio’s income tax rates have been below their original 1972-1982 levels since 2015.

House Bill (HB) 110, the FY22-23 state budget bill, enacted additional changes to Ohio’s income tax rates and structure. The House FY22-23 budget proposed an “across the board” 2% reduction in Ohio’s 2021 marginal tax rates while maintaining the same “five bracket” structure created in HB 166 (the FY20-21 budget bill). The Senate proposed a similar across the board reduction, with a 3.5% decrease in bracket rates in 2021 followed by a 1.5% decrease in 2022 for a total reduction of 5% in bracket rates over the biennium.

However, the final version of the FY22-23 budget included a much larger income tax reduction than that proposed by either the House or Senate. HB 110 increased the zero bracket minimum income from $22,150 to $25,000 and provided 3% rate reductions for the three lowest tax brackets. These two changes are similar to those made two years ago in HB 166 and by themselves would have resulted in a modest increase in the progressivity of Ohio’s income tax structure (by increasing the number of persons who owe no state income tax). However, HB 110 also decreased the tax rate on the second highest income bracket ($110,650-$221,300) by 9.6% and completely eliminated the highest marginal tax bracket (income greater than $221,300). Income of persons earning more than $221,300 is now taxed at the same rate (3.99%) as that of persons with income between $110,650 and $221,300, which amounts to a 16.8% decrease from the 2020 rate of 4.797%. By lowering the tax rates paid by Ohio’s highest income earners much more than on lower income earners, the FY22-23 state budget has reduced progressivity and made Ohio’s state income tax less equitable.

LSC estimates the total cost of the HB 110 tax reductions at $1.643 billion for the biennium ($885 million in FY22 and $758 million in FY23). By comparison, the House-proposed income tax reductions were estimated to reduce general revenue fund (GRF) tax revenue by $338 million for the biennium and the Senate-proposed income tax cuts would have reduced GRF tax revenue by an estimated $540 million for the biennium. Thus, the actual income tax reduction contained in HB 110 was nearly five times as large as that proposed by the House and more than four times as large as that proposed by the Senate. By comparison, the K-12 school funding increase in HB 110 was $564 million for the FY22-23 biennium, just over 1/3^rd the cost of the income tax reductions. Furthermore, the continued impact of the $1.643 billion reduction in tax revenue will certainly be felt in the FY24-25 budget when additional resources will be needed to continue the phase-in of the new school funding formula as well as for other budgetary priorities.

Below is a summary of how Ohio’s state income tax has evolved over its 49-year history.

• From 1972-1981 Ohio’s state income tax had six brackets with rates ranging from 0.5% on income less than $5,000 up to 3.5% on income greater than $40,000.
• In 1982, two additional rate brackets were added.  Income from $40,000-80,000 continued to be taxed at the former maximum rate of 3.5%, while income from $80,000-$100,000 was taxed at 4% and income greater than $100,000 was taxed at 5%.
• Also, in 1982 rates were temporarily increased by 25%, with the new rates ranging from 0.625% on income less than $5,000 up to 6.25% on income greater than $100,000.
• Rates were again increased by 46.6% in 1983 and by an additional 3.7% in 1984. These new rates were intended to be permanent. The 1983 rates were an 83.3% increase over the 1981 rates while the 1984 rates were a 90% increase over the 1981 rates. The 1984 tax rates ranged from 0.95% on income less than $5,000 up to 9.5% on income greater than $100,000.
• In 1985, a 15% rate reduction over three years was implemented, with 5% reductions (compared to 1984 rates) applied in 1985, 1986 and 1987. These rates would have ranged from 0.8075% on income less than $5,000 to 8.075% on income greater than $100,000.
• However, an additional rate cut of 14.55% on income above $100,000 and 7% on the other seven tax brackets was implemented in 1987 on top of the preceding 15% reduction. 1987 rates ranged from 0.751% on income less than $5,000 to 6.9% on income greater than $100,000. This was the first time that an income tax rate reduction was not applied evenly to all brackets and the larger reduction of the highest bracket rate reduced the equity of the income tax’s graduated rate structure.
• In 1988, an additional 1% rate reduction was applied to all but the top rate bracket (which had been reduced more than twice as much as the other brackets in 1987). The new rates ranged from 0.743% on income less than $5,000 to 6.9% on income greater than $100,000. These rates remained in place through 1992.
• In 1993, a ninth rate bracket was added, taxing income over $200,000 at 7.5%. Income between $100,000 and $200,000 continued to be taxed at the existing rate of 6.9%.
• In 1996, a new state law was enacted which would temporarily (for one year) reduce income tax rates in any year when a state budget surplus existed. Tax rates were subsequently reduced (compared to 1995 rates) by 6.6% in 1996, 4.0% in 1997, 9.35% in 1998, 3.6% in 1999 and 6.9% in 2000. All of these reductions were “across the board” cuts applied to each rate bracket. No rate cuts were implemented from 2001 through 2004.
• In 2005, HB 66 was enacted which implemented a broad array of reforms to Ohio’s state and local tax structure. A 21% decrease in Ohio’s income tax rates was one of the changes made. This was designed to occur as a series of five 4.2% rate reductions (compared to the 2004 rates). The first four rate reductions were implemented from 2005-2008, with 2008 rates reduced to a range of 0.618% on income less than $5,000 up to 6.24% on income greater than $200,000. However, in 2009 the final 4.2% rate reduction was delayed for two years (until 2011) because of the impact of the 2008-2009 recession. The 2008 income rates were now at a level below the 1982 tax rates.
• In 2010, a provision calling for adjustment of Ohio’s income tax brackets for inflation was implemented. This is known as “indexing” and mitigates a phenomenon that economists call “bracket creep” where income tax payments can increase when inflation in wages pushes taxpayers into higher tax brackets.
• In 2011, the final year of the HB 66, a 21% income tax reduction was implemented. The new tax rates ranged from 0.587% on income less than $5,100 up to 5.925% on income greater than $204,200. It is commonly believed that the reason a 21% income tax rate reduction was chosen was to decrease the highest bracket rate from 2004’s rate of 7.5% to below 6%.
• In 2012 the tax rates remained the same, but the rate brackets were “indexed” and adjusted for inflation.
• In 2013, a 10% income tax cut was enacted. The cut was initially supposed to be implemented over three years with an 8.5% reduction in 2013, an additional 0.5% reduction in 2014 and a final 1% reduction in 2015; however, this was later accelerated with the final 1.5% reduction occurring in 2014. The new 2014 tax rates ranged from a low of 0.528% on income below $5,200 up to a rate of 5.333% on income greater than $208,500. Indexing of the rate brackets was also suspended beginning in 2013.
• In 2015 income tax rates were again reduced, this time by 6.3%. The new 2015 tax rates ranged from a low of 0.495% on income below $5,200 up to a rate of 4.997% on income greater than $208,500. It is commonly believed that the reason a 6.3% income tax rate reduction was chosen was to decrease the highest bracket rate to below 5%. The 2015 income rates were now at a level below the original 1972 tax rates.
• In 2016 indexing of the tax brackets was reinstated.
• In 2017, HB 49 reduced the number of tax brackets from nine to eight by consolidating the two lowest brackets and setting the tax rate for persons with income below $10,650 to 0%. All other rates remained at the existing (2015) levels and now ranged from a low of 1.98% on income between $10,651 and $16,100 up to 4.997% on income greater than $213,350. By combining the two lowest brackets and setting the rate to 0% the equity of the income tax’s graduated rate structure was improved.
• In 2019, HB 166 implemented a 4.0% rate reduction and reduced the number of tax brackets from eight to six by combining the bottom three tax brackets. Tax rates now ranged from 2.850% on income between $21,751 and $43,450 up to 4.797% on income greater than $217,400. Individuals with income below $21,750 paid no state income tax. Again, the consolidation of the bottom tax brackets and the more than doubling of the “zero bracket range” improved the equity of Ohio’s income tax structure.
• In 2021, HB 110 increased the zero bracket range up to income less than $25,000, reduced the rates of the three lowest income tax brackets by 3.0%, reduced the rate of the fourth bracket ($110,650-$221,300) by 9.6%, and eliminated the top income bracket entirely (which amounted to a 16.8% decrease in the tax rate on income above $221,300). Tax rates now range from 2.765% on income between $25,001 and $44,250 up to 3.99% on income above $110,650. While the increase in the zero bracket range from $22,150 to $25,000 is an improvement in equity, this change is swamped by the impact of the elimination of the top bracket (income greater than $221,300) and the 9.6% rate reduction on the now highest bracket – which was more than triple the rate reduction that the remaining three tax brackets experienced.
• The current tax rates are now roughly 8% below the original 1972 income tax rates on income between $25,000 and $44,250, 8% below the original 1982 income tax rates on income between $44,250 and $110,650, and 20% below the original 1982 tax rate on income above $110,650. Overall, the equity of Ohio’s graduated income tax structure is now markedly worse than it was in 2020.

Table 1 below provides a comparison between Ohio’s original state personal income tax rates (in effect from 1972-1981), the 1982 rates after the two additional rate brackets ($80,000-$100,000 and > $100,000) were added and prior to the 25% rate increase necessitated by the 1981 recession, the 1993 rates which included the addition of a new top bracket for income greater than $200,000, and Ohio’s current 2021 income tax rates established in HB 110.

Table 1: Ohio State Income Tax Rates 1972, 1982, 1993 and 2021

* From 1972-1981 all income greater than $40,000 was taxed at 3.5% and in 1982 all income above $100,000 would have been taxed at 5.0% (prior to the 25% rate increase in response to the recession). And in 2021 the top rate bracket of 4.797% on income above $221,300 was eliminated.

Table 1 clearly shows that Ohio’s current tax rates are noticeably lower than those from 1982 prior to the imposition of the rate increase. Ohio’s current tax rates are also lower than the rates applied to incomes less than $88,450 in 1972 when the top tax bracket included all income above $40,000. Table 1 also shows that the 2021 current rate of 3.99% on income above $200,000 is slightly more than half the 7.5% tax rate in effect in 1993 when this rate bracket was first created.

Finally, income tax rates have been reduced by 38% (and more than 40% on the highest earners) since the HB 66 reductions were initially implemented in 2005. It is difficult not to imagine how much more state funding would have been available for K-12 education – as well as other government services – over the past 15 years had the state not so aggressively (and persistently) reduced income tax rates.