Crain’s Cleveland Business first published this opinion piece.

The 2025 budget process gives Ohio a second chance to fix a faulty quirk in the state’s tax code. Gov. Mike DeWine and the General Assembly should take it.

Like many states, Ohio has a progressive personal income tax system that levies lower taxes on lower earners. Since 2007, Ohio indexed its income tax brackets to inflation, so as inflation rose, so did the minimum threshold for each graduated tax bracket. That policy prevents earners from facing higher tax rates as they lose purchasing power to higher inflation.

But Ohio’s 2023 tax bill made two significant changes to the income tax as part of a broad tax cutting strategy. First, it simplified the tax code by eliminating two personal income tax brackets and leaving only two. And second, it suspended the indexed-to-inflation tax bracket policy for two years.

Today, Ohio taxpayers do not pay taxes on the first $26,050 of income, but making one dollar more moves earners into the first tax bracket subject to a 2.75 percent tax rate and a flat $361 “tax” leftover from a lower but-now-eliminated tax bracket. The added $361 surcharge is a huge tax hit for lower-income earners, and some would be financially better off in the short run working and earning less to avoid paying it. But in the long run, tax policies that discourage work ultimately cost earners valuable training, experience, and opportunities that lead to better jobs and higher wages down the road. Now is the time to fix that problem.

When the Ohio Senate suspended the bracket indexation in 2023, its bill also started the elimination of the $361 tax assessed on taxpayers entering the first tax bracket. Gov. DeWine, however, used his line-item veto to keep that residual tax in the final budget legislation. Thus, the General Assembly’s good-faith effort to temporarily suspend one bad tax policy in order to permanently correct an even worse tax structure was thwarted. Since then, inflation rates reached 40-year highs while tax bracket thresholds remained the same, costing Ohio taxpayers an extra $663 million.

The 2023 budget process included tax reforms that saved businesses and taxpayers $3 billion, raised the floor of the gross receipts tax to give small businesses some much-needed tax relief, and increased public spending virtually across the board while maintaining a record “rainy day fund” for managing unexpected crises. Those successes mattered and should not be discounted or dismissed. But the failure to eliminate the regressive $361 tax bump in 2023 should not be repeated in 2025.    

The General Assembly should re-index the tax brackets to inflation and, this time, end the residual tax penalty, too. Biden-era prices have yet to subside, lower-income taxpayers should not be discouraged from working, and Ohio households still struggle to make ends meet. To offset potential lost revenue from eliminating the tax bump, state policymakers should take a few pages from The Buckeye Institute’s most recent Piglet Book and close tax loopholes, end corporate welfare payments, and streamline government spending and bureaucracies. Those savings will provide a win-win for taxpayers—eliminating a regressive tax burden and making the tax code fairer.

But the General Assembly should be wary of the governor’s line-item veto lest he be tempted again to raise revenue and strike a commonsense tax reform. Fool me once, shame on you—fool me twice, shame on me, as the saying goes. House and Senate leaders should have the votes to override a gubernatorial veto before they pass a budget and tax reform bill that could prove costly to taxpayers.

The 2025 budget process gives the General Assembly a chance to take care of some unfinished business by fixing a flaw in the state’s tax code. And it shouldn’t let the governor stand in the way.

Rea S. Hederman Jr. is the executive director of the Economic Research Center at The Buckeye Institute.