Currently, the Ohio House and Senate are in negotiations over the Ohio state budget. The budget for the Ohio House included broad-based income tax cuts while the budget for the Ohio Senate focuses on business and income tax cuts that largely benefit upper-income residents.
A recent analysis by Richard C. Auxier and David Weiner of the Urban-Brookings Tax Policy Center looks at an alternate strategy for tax cuts and its impact on the income distribution in Ohio. Rather than approaching tax cuts through reductions in income tax rates, this analysis looks at how a child tax credit would impact household incomes. The analysis looks at a proposal for a child tax credit that is cheaper at $550 million per year than the current Senate tax cut proposal of $780 million per year.
Using the TPC state tax model, they find the Ohio Senate’s tax reduction would lead to no additional income for households making under $50,000, less than $100 annually for households in the $50,000 to $75,000 range, a few hundred dollars annually for families in the $75,000 to $200,000 range, and over $800 annually to the average family making more than $200,000.
As we have written before, this sort of distribution of public funds can be undesirable from a welfare standpoint because households with more income have less use for additional dollars than low-income households.
A $250 tax credit for households with children, on the other hand, would have benefits distributed throughout income categories. Their analysis projects that the average household across nearly every income bracket would save $100 under the proposal. The results are even more dramatic for families who would receive the credit, with them receiving an average of about $400 per household across all income brackets. This impact comes 30% cheaper than the Senate proposal, suggesting the intervention could be more equitable and cost less than the current proposal.
Why does the child tax credit offer benefits to low-income individuals that overall tax cuts do not? This is because upper-income households pay more in income taxes than lower-income households currently, so they have more to gain from an income tax cut. A flat child tax credit, on the other hand, applies to all households with children.
Their analysis also puts forth a number of policy alternatives that can be adopted by policymakers in Ohio. This includes a couple of cheaper policy options than the $550 million child tax credit proposal including a $440 million proposal that limits benefits to young children and a $315 million proposal to make the CTC nonrefundable, limiting its benefits to middle- and upper-income households. They also offer a $640 million proposal to make the state earned income tax credit refundable, which would help lower- and middle-income households. All three of these alternatives are more affordable than the current $780 million income tax cut proposed by the senate.
Analysis like this is important because it challenges policymakers to get creative. If policymakers want to reduce taxes, they can do that in a way that also promotes equity goals. It just means taking potential policy options seriously.