Buckeye Reporter

The Buckeye Institute has released a policy memo highlighting the financial impact on Ohio taxpayers due to the suspension of inflation-indexed tax brackets. According to the institute, this decision cost Ohioans $663 million during the 2023-2024 period.

Zachary D. Cady, an associate economist at The Buckeye Institute, illustrated how indexing tax brackets to inflation could prevent wage earners from being pushed into higher tax brackets as their incomes rise to match inflation. He explained, “the minimum threshold for the two percent tax rate will automatically rise to $51,500, so that income between $50,000 and $51,500 will still be taxed at one percent.” This adjustment allows workers earning less than $50,000 to seek raises without moving into a higher marginal tax bracket.

Cady urged lawmakers to make inflation-indexing a permanent feature of Ohio’s income tax policy. He stated that lawmakers should “resist the temptation to suspend indexing going forward.”

The Buckeye Institute's memo noted that Ohio was previously among 24 states with indexed income tax brackets. Indexing helps maintain purchasing power by ensuring that salary increases due to inflation do not result in higher taxes. The memo argues that suspending this system increased state revenues but burdened Ohio workers during a significant inflationary period.

Ohio's progressive income tax system can lead to "bracket creep," where wage earners face higher taxes despite only receiving pay increases intended to offset inflation. For example, under an indexed system with a three percent inflation rate, individuals earning just below $50,000 can receive raises without crossing into a higher tax bracket.

The institute also pointed out that those who did not receive pay increases would benefit from lower overall taxes under an indexed system. In their analysis, they used data from the U.S. Census Bureau and federal GDP deflator metrics to estimate the fiscal impact of suspending indexation.

In conclusion, The Buckeye Institute calls for Ohio to reinstate its practice of indexing personal income tax rates according to inflation and cautions against future suspensions. They argue this is necessary given recent economic pressures on households in the state.