On Tuesday, a coalition of Ohio Republicans revealed a proposal to phase out the state’s personal income tax by 2030, thereby diminishing a significant funding stream for essential services such as schools and Medicaid.
Legislators are set to introduce two bills in both the House and Senate, outlining a gradual reduction and eventual elimination of the income tax. Additionally, the plan includes the removal of the commercial activity tax levied on specific businesses. This initiative follows the enactment of a new budget less than a year ago, which streamlined Ohio’s income tax brackets from three to two.
Under the current system, Ohio residents earning up to $100,000 annually face a 2.75% tax rate, while those exceeding this income threshold are subject to a 3.5% rate. Individuals earning less than $26,050 are exempt from state income taxes.
Senator George Lang, a Republican from West Chester, expressed the objective of transforming Ohio into “the most business-friendly state in the nation and to financially dominate the rest of the country.”
Advocates of the proposal argue that it will enhance Ohio’s competitiveness. According to a 2023 report from Americans for Prosperity Ohio, an organization advocating conservative policies, the increasing prevalence of remote work makes it more convenient for Ohio residents to relocate in search of a reduced tax burden.
The report emphasized that Ohio should take note of the examples set by other states actively pursuing bold tax reforms, or else face the prospect of lagging even further behind. It underscored that businesses and workers may seek economic and competitive advantages elsewhere if such reforms are not implemented.
However, a crucial and unanswered question remains:
How would the state cover the financial gap resulting from the elimination of the income tax?
Ohio’s income tax is a significant contributor to the general revenue fund, generating over $10 billion annually, as outlined in the analysis of the state’s two-year budget. Notably, this amount falls short of the $11 billion earmarked for K-12 education in the 2024 and 2025 fiscal years. The general revenue fund also supports essential areas such as mental health facilities, development projects, and prison operations.
In the 2022 fiscal year, the commercial activity tax (CAT) brought in $2.5 billion before accounting for credits, according to the Ohio Department of Taxation. However, the recently enacted two-year budget eliminated the CAT for the majority of businesses, with only those having taxable receipts exceeding $3 million remaining subject to it.
“We’re going to protect those most vulnerable,” Mathews said, “and we can find a way to balance the budget while keeping those crucial features in place.”