Overhauling Ohio's Progressive Income Tax
April 21, 2003
Ohio's state income tax is highly progressive compared with neighboring states, and is well above average when compared with all others. Its highly progressive tax system slows economic growth, say economists, because each dollar of additional income is taxed at higher marginal rate, discouraging additional work and investment.
By reforming Ohio's income tax to make it less progressive, Ohio could increase the rate of economic growth and enjoy more stable tax revenue.
Progressivity increases the volatility of Ohio's income tax revenue. For example, if Ohio's economic activity fell by 10 percent during a recession, the state's income tax revenue would fall by 12.2 percent.
To reduce progressivity, policymakers can:
- Compress the marginal tax rate structure by reducing the number of brackets or reducing the spread between the top and bottom tax rates.
- Decrease the level of the standard deductions and personal exemptions.
- Allow taxpayers to deduct federal income tax liability from their Ohio taxable income.
From the standpoint of economic growth, however, lowering and compressing tax rates is the preferred reform.
Source: Russell Sobel and Robert Lawson, "Income Tax Progressivity in Ohio," Buckeye Institute, April 15, 2003.
For text http://www.buckeyeinstitute.org/
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