Replacing the Irreplaceable

A proposed initiated constitutional amendment in Ohio would prohibit all taxes on real property, eliminating an estimated $21.1 billion in revenue for the state’s schools and municipalities. If voters approve the measure, state lawmakers would only have one year to adopt replacement revenue mechanisms and establish formulas for allocating the offsetting revenue. This paper estimates state-level rate increases necessary to offset the loss of property tax revenue under both individual income and general sales taxes, evaluates options for allocating that replacement revenue, and examines the economic and distributional consequences of such a tax shift.

Full revenue replacement under the central scenario would require an 8.24 percent flat state-level individual income tax, yielding a 10.29 percent combined state and local flat rate. Three graduated-rate income tax alternatives are also considered, all producing top state-level rates above 12 percent under central assumptions. An offsetting increase in the general sales tax would require a 13.36 percent state rate, for an average combined state and local rate of 14.53 percent. Whatever replacement option is selected, both the new revenue instrument and the means of revenue allocation will necessarily yield substantial divergence from current tax distributions, often involving a substantial shift in resources from urban to rural counties, or vice versa.