Updated: Apr 18
HB 1 – Income Tax and Property Tax Policy Changes
Public education funding is a shared responsibility of state government and local communities. The state establishes the funding formula and provides its contribution in the state budget. It also delineates the local responsibility. A variety of state revenue sources, including income taxes, are used to fund public education and all education options. Local property taxes fund the school district investment in their public schools.
HB 1 is relevant to school funding because it changes state revenue and local tax policies that directly affect state and local capacity to fund public services, including public education.
What Does HB 1 Do?
In the name of retaining upper middle class and wealthy families, the bill proposes:
1. A tax cut for the wealthy. HB 1 replaces the graduated income tax rate with a flat tax rate of 2.75%. It would reduce state revenue by an estimated $2 billion.
The Institute on Taxation and Economic Policy’s statistics help produce a chart that shows how it is again the wealthiest Ohioans who benefit from this flat tax. The people who need the help the most receive no benefits. And this is only the movement from a progressive graduated income tax to a flat tax! As it is, Ohio policymakers have made significant changes to personal income taxes over the past 17 years, lowering rates and making the structure more regressive. Since state lawmakers passed House Bill 66 in 2005, they have slashed income tax rates across the board, increased the threshold at which low-income households begin to pay taxes, and eliminated the top income bracket.
2. A tax increase on local property tax payers. Added to the impact of the flat tax, is the effect on property taxes by the additional provisions in the bill:
Decreases, from 35% to 31.5%, the percentage of real property’s value that is subject to taxation. This reduces the revenue that can be produced by property taxes, and reduces the revenue available to fund public schools and other public services funded by local property taxes.
Repeals the 10% tax rollback on nonbusiness property. Under the rollback, the state pays roughly 10% of each residential and agricultural taxpayers’ property taxes. It currently saves taxpayers $1.22 billion in local property taxes.
Modifies the 2.5% homestead tax rollback to equal a flat $125 property tax credit for all owner-occupied homes.
LSC reviewed each of these changes. While the interplay of these changes is complicated and effects will vary significantly for individual taxpayers and homeowners, the net impact in the aggregate is property-tax increases.
Policy Matters Ohio figured the ongoing long-term effects after the initial phase-in period based on the LSC analysis. It found that HB 1 would mean:
Property tax increases of at least $600 million a year for residential and agricultural property owners, which result from changes in the bill and the operation of Ohio’s existing property tax limit, known as House Bill 920.
Reductions in property tax and state aid received by schools, local governments and libraries of over $500 million a year, though losses to schools would be partially offset by increases in aid through the foundation formula.
Some $780 million a year in net losses for the state that are not paid for in the bill. This takes into account $1.79 billion in reduced annual revenue for the General Revenue Fund because of the flat tax and additional expenses from paying for expansions of the homestead exemption, offset by $1.3 billion in reduced expenses by no longer covering the 10% rollback (LSC also said any indirect increase in revenues caused by the cuts likely would be small compared to the direct effects).
Reduced property taxes for business property owners of $157 million a year.
While the losses to schools would be partially offset by increases in the funding formula, the decrease, from 35% to 31.5%, the percentage of real property’s value that is subject to taxation would raise property tax rates and make it harder to pass local levies.
LWVO Opposes HB 1
A flat tax benefits the wealthy, and puts an unfair burden on middle class and low-income taxpayers. It isn’t fair and it perpetuates an economic divide. It’s punitive public policy.
The revenue loss triggered by this tax cut will make it harder for the state to pay for services like public education, that provide the quality of life that makes Ohio an attractive place for anyone to live.
Increasing the property tax burden on agricultural and residential property owners is regressive, undermines public trust, and exacerbates the negative impact of property taxes on equal access to quality education.
HB 1 ties the hands of local communities as they seek to serve their residents and fund their public schools.
Resources to explain the bill
What You Can Do
Tell your legislators: No Flat Tax!