The centerpiece of the state budget plan unveiled by John Kasich last week is a 20 percent reduction in individual income tax rates. The governor views the rate cuts as indispensable to spurring the state economy. He talks about how the current top rate drives talented Ohioans to flee the state for less burdensome locations, say, Florida, which doesn’t have an income tax.
The reality is, little evidence supports the governor’s argument. The state Department of Taxation doesn’t track whether Ohioans depart for tax purposes. The governor may have anecdotes to relay. They are no substitute for the broad and concrete. Economists long have explained that tax rates rarely prove so decisive in the performance of a state economy. Taxes do not rank as high as such items as the quality of the work force, the innovative capacity and the ease of doing business.
What has been firmly established is that income tax cuts favor those at the highest rungs of earners. That is how the Kasich proposal would work.
Consider an early evaluation of the tax-cut plan by Policy Matters Ohio, a Cleveland-based think tank. It found that the top 1 percent of taxpayers, with annual incomes above $335,000, would receive an average income tax reduction of $7,777. Those at the first rung down, with more than $143,000 in yearly income, would see their income tax burden eased by $1,358 on average.
The middle one-fifth of taxpayers, with annual incomes between $33,000 and $51,000? They would gain an average $144. The sum would be lower for the next one-fifth down and the bottom one-fifth, tax relief of $55 and $7, respectively.
Add another element of the governor’s tax cuts, a 50 percent reduction on the first $750,000 in income for small business owners, and the relief expands for the top 1 percent, resulting in an average $4,357 per year. No question, wealthier Ohioans would pay more in sales taxes under governor’s plan to expand the base and lower the sales tax rate. Yet that would amount to a small fraction of their overall relief. At the same time, those at the middle and down would see a slight tax increase.
Recall that the top income tax rate in Ohio was 9.025 percent in the 1980s. It dropped to 6.9 percent in 1990, and then returned to 7.5 percent in 1995, the state economy growing and creating jobs. The 2005 tax reductions set the top rate on a path to 5.925 percent. Now John Kasich has called for a 4.74 percent top rate.
The argument goes that those at the top receive large tax cuts because they pay such a large portion of income taxes. Worth stressing is that during the past three years of a struggling recovery, a troubling trend has deepened, the bulk of new income flowing to the top 1 percent. One study puts the share at 93 percent of all income growth.
Such income inequality ill serves the country and the state, among other things, dampening consumer spending and the ability of so many to invest in themselves, from education to starting a small business. Yet the Kasich tax cuts would work to aggravate the problem.