How Much Revenue Would Ohio Gain, If Ohio’s 2005 Tax Reduction Act Was Rescinded For Top Incomes?

I received a prompt reply from Zach Schiller to the e-mail I sent to him yesterday as reported — Question For Policy Matters Ohio, Zach Schiller: Was Tax Data Used In Your DDN Article Incorrect?

Schiller had written in a DDN article that if Ohio’s 2005 Tax Reduction Law was modified, to reinstate the top income tax rate of 7.5% on incomes over $200,000, that Ohio would gain $375 million each year in additional revenue. I objected to this statement because I’ve been posting that that correct amount of additional revenue would much more than $375 million. I estimated the amount of reduction to be $572 million — if the top rate was applied to incomes over $340,000

I’ve written a number of posts that used the Ohio Policy statistic that incomes in excess of $340,000 received 26% of the total of tax reductions of $2.2 billion ($572 million).

Schiller pointed out my mistake. When the top rate of 7.5% is reinstated on incomes over $200,000, the Tax Reduction Act still applies to incomes less than $200,000 and these incomes will still get a 21% decrease in tax. Someone earning $250,000, for example, would pay additional tax only on the $50,000. Reinstating the top 7.5% rate would mean that for every $10,000 of income over $200,000 an additional tax of $157.50 would be required. If the 7.5% tax was reinstated, a taxable income of $250,000 would need to pay $788 in additional Ohio taxes.

In my new e-mail to Schiller, I ask for an explanation for how the $375 million was calculated. My estimate was much too large, but, it seems to me Schiller’s number is too small.  Based on an earlier Policy Matters article (p. 6 chart), it still seems to me that the accurate amount should be much greater than $375 million. I’m wondering if I’m making some other dumb mistake.  Here is the e-mail that explains my reasoning:

Zach, thanks for the reply.  You point out that in my thinking I made a fundamental error. According to Honeck’s chart, the top 1% of incomes received 26% of  the total tax reduction of $2.2 billion or $572 million.   My error was that I didn’t account for the fact that if the top rate of 7.5% for incomes in excess of $200,000 would be reinstated, then, of course this top 1% of incomes — incomes in excess of $339,000 — according to the 2005 Tax Reduction Act, would still have taxes on the first $200,000 reduced by 21%.

But, it seems to me that Honeck’s chart indicates that if the 7.5% top rate would be reinstated on incomes in excess of $200,000, then a lot more than $375 million would be recouped.

Look at only that top 1% of incomes.  According to Honeck, this group starts at incomes of $339,000 and the average income for this group is $890,000.  If the top rate of 7.5% were reinstated only for this group, then, on average, the new tax would be .075 x (890,000 – 339,000) = $41,325.  The 2005 Tax Reduction Act reduced this by 21% or $8678.   So reinstating the 7.5% top rate would mean that, on average, $8678 of the  $10,273 current average tax savings for these top incomes (Honeck’s chart) — 84.5% —  would be recouped.

If 84.5% of the tax reduction for incomes in excess of $339,000 is recouped, then, according to the above, this would amount to 84.5% of $572 million or $483 million.

I think a good recommendation to the State Assembly would be that a new tax bracket be made that would reinstate the 7.5% tax rate for only this top 1% group.  The public would be much more willing to reinstate the 7.5% top rate on incomes in excess of $340,000, rather than reinstating it on all incomes in excess of $200,000.

If the 7.5% top rate would be reinstated on taxable incomes in excess of $200,000, rather than $339,000, according to Honeck’s chart, according to the reasoning above, the amount recouped would be much more than the $375 million that you cite.    (I don’t have the data to calculate how much would be recouped on incomes from $200,000 to $339,000.)

Any enlightenment you can give to all of this will be appreciated.  Thanks.