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Ohio Digs Its Budget Hole Deeper

Ohio, which has cut K-12 and higher education funding, health care and child care assistance for the poor, and other public services over the past few years to help close budget shortfalls, is poised to give its wealthiest residents a big new tax cut starting in 2013.  The 2012 budget that the legislature approved this week eliminates the state’s estate tax, which generated more than $280 million in revenue in 2010.

The people who pay Ohio’s estate tax are the ones who least need a new tax cut:

  • Only the estates of the wealthiest 8 percent of residents owe the tax because the first $338,000 in any estate’s value is entirely exempt.  (The estate tax rates are 6 percent on amounts between $338,000 and $500,000 and 7 percent on amounts over $500,000.)
  • Estates of over $1 million pay more than three-fourths of the tax.

But the loss of revenue will hurt Ohioans as a whole by putting basic public services like police, fire, and road maintenance at risk.  The state sends most of the revenue from the tax to cities, towns, and villages to support local services, retaining only one-fifth to help fund the services that the state provides.

  • More than 100 communities across Ohio received at least $400,000 annually from the estate tax in recent years.  Cincinnati, the largest recipient at $13 million a year, will have to cut public safety workers if the funding disappears, according to the mayor and city manager.  The lost tax revenue in Cincinnati is enough to fund 247 firefighters or 216 police officers.  Smaller places will be hit hard, as well; Jackson Township in Stark County (population around 40,000) relies on estate tax revenue for 17 percent of its budget, for example.
  • Ohio’s new budget will also squeeze localities by severely cutting the Local Government Fund (an important revenue source for local governments) and reimbursements for removing certain property from the tax rolls.  Loss of estate tax revenue would magnify the damage.

Making the budget problem worse by eliminating existing revenue sources is the wrong way to go, and eliminating taxes targeted on the people best able to pay them is even worse.

The best strategy for states and local governments to deal with budget gaps remains what it always has been — a balanced combination of modest spending cuts, new revenue measures, and use of any remaining reserves.