Phase out income tax? Not quite yet

Is the state personal income tax being phased out in Ohio?

The Ohio Senate passed a budget Thursday calling for a 10-percent reduction in the income tax rate over three years. If the House agrees and governor approves, that would follow a 21-percent cut approved in 2005 and phased in over five years.

The income tax cut would be offset partially by a higher sales tax on a broader array of goods and services. In other words, tax earnings less and tax spending more.

Now, seven states have no income tax on individuals. They are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states, Tennessee and New Hampshire, only tax dividend and interest income.

Just five states do without a sales tax – Alaska, Delaware, Montana, New Hampshire and Oregon.

Some of these states have significant income from severance taxes on oil and gas which allow omission of sales taxes, income taxes or both. Ohio likely will get such a tax to take advantage of shale oil and gas developments, but don’t expect it to pay for the income tax cut, let alone allow the state to drop the personal income tax completely.

That’s because individual income tax collections in Ohio last year totaled $9 billion. Meanwhile, the sales tax collected $8.2 billion, not including the $4 billion netted from selective sales taxes such as the excise tax on gasoline.

So, the sales tax would have to be much greater to make up for the loss of the personal income tax. One catch is there are more services than imagined when the sales tax began in 1935.

Thus, the move to tax the sales of digital goods –

e-books, music files – purchased over the Internet, and Gov. John Kasich’s proposal to subject an even broader array of services to the tax.

Ohio’s income tax tends to demand more of those with higher incomes, while the sales tax tends to be more of a burden on those with lower incomes. The Columbus Dispatch reports, “For taxpayers earning between $22,000 and $44,000, a 10-percent cut would save an average of $79. For those earning $44,000 to $88,000, the average cut would be $209.”

Yet that doesn’t appear to be a major obstacle to those now wielding legislative and executive power in Columbus.

Whether the individual income tax in Ohio can be phased out entirely may depend on state lawmakers and administrators reducing spending and increasing revenues from other sources to make up for lost funds.