Ohio is one of a growing number of states which experienced revenue increases despite the economic slowdown from the coronavirus pandemic and is now looking to return some of that through tax relief. (See analysis of Arizona, Kansas, Louisiana, Montana, and Oklahoma). The question for Ohio legislators is, how best to do that?

This week, the Ohio Senate released its budget proposal for the upcoming fiscal biennium (2022-2023) and it includes a 5 percent tax cut to personal income taxes. That differs from earlier versions offered by  Gov. Mike DeWine (R), which offers no cuts to the income tax, and the Ohio House of Representatives, which includes a 2 percent cut. The Senate proposal also offers a solution to the issue of cities taxing nonresident workers who haven’t been coming to their offices in those cities throughout the pandemic.

The following table compares the current rate structure to those proposed by the House and Senate.

Ohio Income Tax Rates, Current & Proposed
Income Brackets Current Rate House Proposal Senate Proposal
$0 0% 0% 0%
>$22,151 2.850% 2.793% 2.708%
>$44,251 3.326% 3.259% 3.160%
>$88,451 3.802% 3.726% 3.612%
>$110,651 4.413% 4.325% 4.192%
>$221,301 4.797% 4.701% 4.557%

Sources: Katherine Loughead, “State Individual Income Tax Rates and Brackets for 2021,” Tax Foundation, Feb. 17, 2021,; and Ohio House Bill 110,

The Senate tax reduction plan would be implemented over two years, trimming rates by 3.5 percent the first year and 1.5 percent the second year. The House tax cut would take effect this year. Ohio already taxes pass-through business income at a flat rate of 3 percent and offers a very generous exemption of $250,000, though these businesses are also subject to the Commercial Activity Tax (CAT), a statewide gross receipts tax.

Neither proposal makes any changes to the brackets, although the Senate plan pauses inflation indexation for tax years 2021 and 2022 as the rate changes are implemented. The above rates and brackets apply to both single filers and to married filers, and neither proposal would fix Ohio’s current marriage penalty. Under a progressive, graduated-rate income tax system, tax rates increase as a taxpayer’s marginal income increases. A marriage penalty exists when a state’s income brackets for married taxpayers filing jointly are less than double the bracket widths that apply to single filers.

The House plan would decrease revenues by $420 million over the biennium, and the Senate plan would decrease revenues by $784 million over the same period.

The American Rescue Plan Act prohibits Fiscal Recovery Funds—Ohio is receiving $5.68 billion at the state level—from being used to facilitate net tax cuts, either directly or indirectly, but the U.S. Department of the Treasury has made clear that states are still free to cut taxes out of their own revenue growth without fear that any Recovery Funds would be recouped. In other words, Ohio must show that it can finance the tax cut without relying on federal aid.

To determine whether a tax cut is funded out of growth, Treasury plans to use Fiscal Year (FY) 2019—the last full fiscal year before the pandemic—as a baseline, looking at inflation-adjusted revenue growth since then. Even with a general fund revenue decline of nearly $900 million in FY 2020, Ohio’s revenue outlook is rosy, with projections from earlier this year showing aggregate revenue growth of $4.7 billion between FYs 2020 and 2023, for an average of $1.18 billion per year and almost $4.3 billion in nominal revenue growth above FY 2019 levels in the two years of tax cuts within the covered period (FYs 2022 and 2023). The Senate plan would return less than 17 percent of the projected revenue growth since FY 2019 (slightly higher in inflation-adjusted terms), or 18 percent of the growth in the two years in which the cuts are implemented.

The Senate plan also provides a refund to taxpayers who paid municipal income taxes to jurisdictions that collected taxes from commuters even though they weren’t commuting during the pandemic. In Ohio, municipalities levy income taxes on nonresidents’ income earned within their jurisdiction. It is not uncommon for localities to levy income taxes on nonresidents for work performed within their borders as a way to recover the cost of the local services utilized by commuting nonresidents. However, during the pandemic, many people worked from home, which severed the fiscal relationship between the taxing jurisdiction and income generated by commuters. Nonetheless, Ohio passed HB 197, which allowed jurisdictions to continue collecting taxes from nonresidents who had been commuting before the pandemic. The Senate Budget would reverse that policy, incorporating the policy outlined in HB 157.

Remote work is likely here to stay, and cities and states will have to grapple with the revenue implications and may find it necessary to adopt policies to better compete with outlying areas. As the Senate proposal acknowledges, taxing people in places in which they no longer work is not a solution.

Finally, the Senate bill exempts employment services and placement services from sales and use tax, and it eliminates the tax expenditure commission. It makes sense to exempt employment services from the sales tax, as it is a business input. Keeping it in the tax base leads to tax pyramiding. Eliminating the tax expenditure commission is more problematic because tax expenditures deserve thorough examination. Too often, they offer very little bang for the buck.

There are several positives in the Senate budget bill—cutting income taxes and rectifying the problematic taxation of nonresidents during the pandemic in particular. Yet, some issues with the income tax remain, particularly the marriage penalty. The state’s nonneutral treatment of pass-through income is less than ideal as well, though in considering modifications, policymakers must bear the additional impact of the CAT in mind.

The Ohio legislature has until June 30 to agree on a budget for the upcoming biennium.

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