Ohio Senate Bill 3 (SB3) – Income Tax Phase-Down
Subject: Analysis of Ohio Senate Bill 3, proposing a phase-down of the state income tax.
1. Executive Summary:
Ohio Senate Bill 3 (SB3) proposes to amend section 5747.02 of the Revised Code to phase down the state income tax to a flat rate of 2.75% over two years. The bill modifies the existing tax structure for individuals, trusts, and estates, affecting income tax rates and brackets for taxable years beginning in 2024, 2025, and 2026 and thereafter. It also temporarily suspends inflation adjustments to income thresholds.
2. Key Themes and Provisions:
- Phase-Down to a Flat Tax Rate: The core objective of SB3 is to transition Ohio’s income tax system towards a flatter structure. The bill gradually reduces the tax rates applied to different income brackets, ultimately aiming for a flat rate of 2.75% on income above a certain threshold by 2026.
- Revised Tax Brackets and Rates: The bill outlines specific tax rates and income brackets for individuals, trusts, and estates for the years 2024, 2025 and 2026 and thereafter. For example, the bill stipulates:
- “For taxable years beginning in 2025…More than $26,700 but not more than $102,400 $369.69 plus 2.75% of the amount in excess of $26,700. More than $102,400 $2,451.44 plus 3.125% of the amount in excess of $102,400”
- “For taxable years beginning in 2026 and thereafter, $378.69 plus 2.75% of the amount in excess of $27,350.”
- Tax on Business Income: The bill addresses the taxation of taxable business income, stating, “the tax imposed by this section on taxable business income shall equal three per cent of the result obtained by subtracting any amount allowed under division (A)(4)(b) of this section from the individual’s taxable business income.” Division (A)(4)(b) provides for a deduction from taxable business income in cases where exemptions exceed adjusted gross income less taxable business income.
- Inflation Adjustments: The bill temporarily suspends the annual inflation adjustments to income amounts prescribed in divisions (A)(2) and (A)(3) of section 5747.02, meaning the income thresholds will not be adjusted for inflation in 2025 and 2026. This is explicitly stated in Section 3: “The Tax Commissioner shall not make adjustments in 2025 or 2026 to the income amounts in divisions (A)(2) and (3) of section 5747.02 of the Revised Code, as otherwise required by division (A)(5) of that section.”
- Trust Taxation: The bill clarifies the taxation of trusts, defining “trust” for the purposes of this section and specifying how the tax is computed for trusts: “The tax imposed by this section on a trust shall be computed by multiplying the Ohio modified taxable income of the trust by the rates prescribed by division (A) of this section.” It also allows resident trusts to claim a credit for taxes paid to other states.
- Purpose of the Tax: The bill states the tax is levied “for the purpose of providing revenue for the support of schools and local government functions, to provide relief to property taxpayers, to provide revenue for the general revenue fund, and to meet the expenses of administering the tax levied by this chapter.”
3. Important Ideas and Facts:
- Bill Sponsors and Cosponsors: The bill was introduced by Senators Lang and Huffman, with cosponsors including Senators Roegner, Romanchuk, Brenner, O’Brien, Wilson, Schaffer, and Wilkin.
- Revised Code Amendment: The bill specifically amends section 5747.02 of the Revised Code.
- Effective Dates: The changes to tax rates and brackets are phased in over taxable years beginning in 2024, 2025, and 2026.
4. Potential Implications:
- Impact on Taxpayers: The phase-down to a flat tax rate could have varying impacts on taxpayers, depending on their income levels. Higher-income earners may see a reduction in their tax burden, while lower-income earners may see little change or even a slight increase if their income falls into the lower brackets.
- State Revenue: The reduction in tax rates could affect state revenue. The legislation is intended to provide property tax relief, which suggests the expectation of offsetting revenue from other sources or reduced spending.
- Economic Effects: Proponents of tax cuts often argue they stimulate economic growth by encouraging investment and job creation. Opponents raise concerns about potential negative impacts on public services and the fairness of the tax system.
5. Further Considerations:
- A comprehensive analysis of the potential fiscal impact of SB3 is recommended.
- A review of the distribution effects of the proposed tax changes on different income groups would be beneficial.
- Consideration should be given to the long-term sustainability of the proposed tax structure.
convert_to_textConvert to source