{"id":590,"date":"2021-10-05T16:40:27","date_gmt":"2021-10-05T16:40:27","guid":{"rendered":"http:\/\/www.oepiohio.org\/?page_id=590"},"modified":"2024-11-07T21:39:37","modified_gmt":"2024-11-07T21:39:37","slug":"brief-summary-of-ohio-state-income-tax-changes-1972-2021","status":"publish","type":"page","link":"http:\/\/www.oepiohio.org\/index.php\/post-derolph-study-on-school-funding\/post-derolph-studies-on-school-funding\/brief-summary-of-ohio-state-income-tax-changes-1972-2021\/","title":{"rendered":"Brief Summary of Ohio State Income Tax Changes 1972-2021"},"content":{"rendered":"

Ohio\u2019s 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 \u201cprogressive\u201d 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 \u201cflat rate\u201d income tax). Furthermore, Ohio\u2019s state sales tax is considered by economists to be \u201cregressive\u201d 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\u2019s state tax structure.<\/span><\/p>\n

Ohio\u2019s 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\u2019s 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\u2019s income tax rates have been below their original 1972-1982 levels since 2015.<\/span><\/p>\n

House Bill (HB) 110, the FY22-23 state budget bill, enacted additional changes to Ohio\u2019s income tax rates and structure. The House FY22-23 budget proposed an \u201cacross the board\u201d 2% reduction in Ohio\u2019s 2021 marginal tax rates while maintaining the same \u201cfive bracket\u201d 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.<\/span><\/p>\n

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\u2019s 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<\/span> 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\u2019s highest income earners much more than on lower income earners, the FY22-23 state budget has reduced progressivity and made Ohio\u2019s state income tax less equitable.<\/span><\/p>\n

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<\/span>rd<\/sup><\/span> 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.<\/span><\/p>\n

Below is a summary of how Ohio\u2019s state income tax has evolved over its 49-year history.<\/span><\/p>\n