Ohio's New Flat Tax Will Worsen Income Inequality, New Study Projects

COLUMBUS, OH — A study released in May by the research group Scioto Analysis projects that Ohio's upcoming transition to a flat-rate state income tax will increase income inequality, reversing some of the modest equalizing effects of the current tax system. The analysis found the policy change will deliver the largest savings to the state's highest earners while shifting more of the relative tax burden to low- and middle-income families. The report centers on the Gini Coefficient, a standard economic measure of income distribution where 0 represents perfect equality and 100 represents perfect inequality. According to the analysis, Ohio’s current Gini Coefficient is 46.6, which is less unequal than the national average of 48.6. The state's existing tax policies play a role in mitigating this disparity. Federal income taxes reduce Ohio's Gini score to 43.7, and the 2023 state income tax structure lowers it further to 43.3. However, the state's planned shift to a single 2.75% flat income tax rate, set to take effect next year, is projected to increase the Gini Coefficient to 43.6. While the change appears small, it represents a move away from the progressive structure that has historically helped to offset the regressive nature of other state and local taxes. This finding comes amid a broader debate about tax fairness in the state. A February 2024 report from the Institute on Taxation and Economic Policy found that Ohio has the 15th most unequal tax system in the nation. It concluded that the state’s poorest 20% of households pay approximately 12% of their income in state and local taxes, whereas the wealthiest 1% pay only about 6%. Carl Davis, the institute's research director, noted at the time that this structure deepens inequality and can limit state revenue for public services. The discrepancy arises because Ohio relies heavily on sales and property taxes, which consume a larger portion of income for lower earners. “A lot of revenue in Ohio is raised by taxing what people buy,” Davis said in the February report, citing necessities like clothing, utilities, and fuel. The state’s progressive income tax has been one of the primary tools to counteract this imbalance. The Tax Foundation, a Washington D.C.-based think tank, noted in its 2026 State Business Tax Climate Index that the move to a flat tax improved Ohio's ranking on its individual income tax component. However, the foundation also acknowledged that Ohio’s extensive system of municipal and school district income taxes creates a much higher combined tax burden than the state rate alone suggests. The Scioto Analysis study explored several alternative policy scenarios and their potential effects on inequality. The most impactful intervention modeled was a negative income tax, which would provide payments to the lowest earners. A substantial negative income tax could have an impact comparable to the entire federal income tax system. Other options that would reduce inequality include reverting to Ohio’s 2003 income tax rates, which would lower the Gini Coefficient to 43.0, or adding a new, higher tax bracket for top earners, which would reduce it to 43.1. These economic disparities have significant statewide consequences. A separate analysis by the Health Policy Institute of Ohio estimated that eliminating racial and ethnic income gaps could boost the state's total annual income by $27 billion and increase the gross state product by $51 billion per year. The report highlighted that incomes for Black and Hispanic Ohioans are about two-thirds those of white Ohioans, with significant disparities also present in homeownership rates. The inequality is geographically concentrated, with Scioto Analysis pointing to major urban centers and rural Appalachian counties as areas of particular concern. While a simplified flat tax appears attractive on the surface, our experience shows that these shifts often introduce new complexities for business owners. The primary change is a redistribution of the tax burden, which can impact consumer spending power at different income levels and affect regional economies unevenly. For businesses in Ohio, the simplification at the state level is also complicated by the state's patchwork of municipal and school district income taxes, which remain a significant compliance challenge. Business owners must look beyond the headline rate change and analyze how the total economic environment is shifting. Proactive planning is essential to navigate both the direct tax implications and the secondary effects on your customer base and local market. For guidance on state and local tax preparation and compliance, business owners can contact C&S Finance Group LLC at csfinancegroup.com to ensure they are prepared for these changes. As Ohio prepares to implement the new flat tax, business owners and policymakers will be closely watching its real-world effects. The debate will likely continue over how to balance the goals of tax competitiveness, simplicity, and economic fairness for all the state's residents.