As the call for property tax relief echoes around the state, some have proposed funding schools with income taxes instead. About a third of Ohio’s school districts already have special income taxes. And more districts are likely to consider asking voters to approve them as part of efforts to reduce property taxes.
But a new report warns that might not work for many districts
Policy Matters Ohio’s Zach Schiller said school district income taxes can have some benefits. For example, he said, they don't tax Social Security income, thereby making it easier for senior citizens who are living on fixed incomes. But Schiller said income taxes also have some flaws.
“With school district income tax, you start paying on your very first dollar of income. With state income tax, until you earn over $26,000 in income, you don’t pay state income tax," Schiller said in an interview. "So this means school district income taxes will fall more heavily on lower-income people.”
Schiller said most districts with income taxes use a traditional base that includes investment income along with wages and salaries. But about 30% of districts with income taxes have them applied only to earned income, which doesn't include money from investments. Schiller said if more districts use the earned income model for income taxes, it would further shift the burden to lower-income Ohioans who don't have investments.
Schiller also said businesses in Ohio pay property taxes for schools unless given an special exemption. But when it comes to a school district income tax, Schiller said that's a different story.
“Businesses don’t pay the school district income tax, so if you are transferring, if you had the same number of dollars to raise between the property tax and the income tax, that much more of it is going to have to be paid by residential owners as opposed to businesses," Schiller said.
That could potentially continue the shift in school taxes away from businesses and toward individuals, largely because of tax abatements. A report from the Ohio Education Policy Institute showed that in 1975, home and farm owners paid 46.1% of school property taxes, while businesses paid 53.9%. In 2023, that had shifted to 67.5% of the property tax share paid by residential and agriculture taxpayers, while 32.5% was paid by commercial owners.
Some have suggested raising the sales tax to compensate for a loss in property taxes. But financial analysts who have studied that possibility have said that would cause sales taxes to skyrocket if property taxes were eliminated. Gov. Mike DeWine agreed on that point.
“Sales tax would go up to a 17, 18, 19%, 20% sales tax in the state of Ohio on products that you buy," DeWine told reporters earlier this year. "It would just be absolutely devastating.”
That’s backed up by a memo the state Office of Budget and Management sent to DeWine in February. OBM estimates that to replace the $24 billion property taxes generate for local governments, the state would have to more than double the sales tax to as much as 18%, significantly higher than any other state, and that it could be broadened to include things not taxed now, such as food and healthcare.
A group that hopes to put an amendment to abolish all property taxes before Ohio voters did not submit signatures for an issue this fall, though they've spent more than a year gathering them. But the Committee to Abolish Property Taxes is continuing its petition drive with the goal of making next fall's ballot.
