The two-year budget plan proposed by John Kasich contains an ambitious set of changes in the state tax code. They include a higher severance tax on oil and gas drilling, a dramatic expansion of the sales tax and a 20 percent reduction in individual income tax rates. The governor’s fellow Republicans in charge of the legislature have balked at the severance tax and sales tax items. They still are determined to fulfill the governor’s call for an income tax reduction.
Might they also find room to adopt a state Earned Income Tax Credit? Such a step would provide an element of fairness. An analysis by Policy Matters Ohio shows the income tax cut generating an average annual savings of $7,777 for the top 1 percent of state taxpayers, or those households with incomes above $335,000 a year. In contrast, the bottom 20 percent would save $7. And the next quintile up the income ladder? A savings of $55.
No question, those at higher income levels pay a larger share of income taxes, and thus stand to benefit to a greater degree. The federal Earned Income Tax Credit, around since the 1970s, is designed to offset the payroll taxes paid by lower-income workers. It works essentially as a tax refund and has been applauded by Democrats and Republicans as one of the country’s most effective tools in fighting poverty.
More, the tax credit has served as an incentive to work. Only those with paychecks are eligible.
As it is, the tax credit has coincided with a sharp rise in income inequality. The years since the recession have mirrored the trend of the past three decades, those households at the highest income levels enjoying large income gains while the bottom 90 percent have seen their incomes stagnate. The Earned Income Tax Credit works to ease the trend, if in a small way.
In 2011, more than 950,000 Ohio families claimed the tax credit, the average refund amounting to $2,238, a significant sum for a low-wage working family. A state Earned Income Tax Credit would supplement the cause. Already 24 states and the District of Columbia have enacted a state version. Typically, the state program works as a percentage of the federal credit, for example, 20 percent in New Jersey and 5 percent in North Carolina.
Many Republicans at the Statehouse point admiringly at the tax policies of Indiana. Since 1999, Indiana has had a state earned income tax credit, set at 9 percent of the federal credit. Michigan also has a program, the credit at 6 percent.
Policy Matters Ohio highlights that here a state earned income tax credit at 10 percent would result in an average benefit of $224, again, a helpful sum. The projected cost to the state would be $180 million a year, or less than 1 percent of the $28 billion in general revenue spending for this year.
The economic policy is sound. Those receiving the tax credit most often use the money to pay for basic needs, such as housing, food and child care. In other words, they help to support local businesses and jobs. A governor and state lawmakers interested in boosting the Ohio economy would do well to enact a state earned income tax credit.
In Summit County, one in five taxpayers do not file for the federal earned income tax credit even though they are eligible. If you suspect you are eligible, call the volunteers at Summit Community Action at 1-866-861-6401. Make an appointment, and the agency will provide free help with preparing and filing your taxes.