Chapter 8 – Budgeting Process
8.5 Sources of Revenue for the State of Ohio
The state government of Ohio relies on several key sources of revenue to fund its operations and services. These sources are essential for supporting public programs, infrastructure, and other important functions in the state.
Sales Tax
A major source of revenue for Ohio’s budget is the sales tax, which is a tax added to the price of goods and certain services at the time of purchase. In Ohio, both the state and counties collect sales taxes to raise revenue for government operations. This tax is important because it grows with the economy and provides a steady stream of income.
Ohio collects a 5.75% statewide sales tax. Counties add their own sales tax (roughly 1 to 2 percentage points), and some areas add a transit tax. As a result, consumers typically pay around 7% to 8%, with most of the tax going to state government.
Personal Income Tax
Another major source of state revenue is the personal income tax. Ohio taxes the income earned by individuals, including wages, salaries, and many other forms of income.
Ohio has recently simplified its income tax system. For tax year 2026, Ohio uses a flat 2.75% rate on taxable non-business income above the state’s tax-free threshold. This means that Ohio no longer has a higher income tax rate for people in the top income bracket.
This is a change from earlier years. In 2024, Ohio had two income tax rates above the tax-free threshold: 2.75% and 3.50%. State lawmakers then reduced and consolidated those brackets. The result is a single 2.75% rate beginning in 2026.
Even with a flat rate, people with higher incomes generally pay more dollars in state income taxes because they have more taxable income.
Progressive vs. Flat Tax
Personal Income Tax – A tax on the money people earn from wages, salaries, or other sources of income. In Ohio, both the state and many local governments collect income taxes to fund public services and programs.
Progressive Tax – A type of income tax in which rates increase as income increases. People with higher incomes pay a larger share of their income in taxes compared to those with lower incomes.
Flat Tax – A type of income tax in which everyone pays the same tax rate regardless of income level. Higher earners still pay more in total dollars, but the percentage is the same for all.
Federal Funds
Federal funds are a major part of Ohio’s budget. The federal government sends money to the state for programs such as Medicaid, education, transportation, and other public services.
Medicaid is one of the biggest reasons federal funding is so important to Ohio. Medicaid is a health insurance program for people with low incomes, including many children, older adults, people with disabilities, and some working adults. The federal and state governments share the cost of the program.
In Ohio, the federal government pays about two-thirds of many Medicaid costs. Because Medicaid is such a large program, billions of federal dollars flow into Ohio each year to help pay for health care. This makes federal funding a major part of the state budget.
Federal funding is also important for transportation. Check out the graphic showing revenue sources for Ohio’s transportation budget. Federal funding is the largest source, followed by the state’s motor vehicle fuel tax. Without federal support, Ohio would have far fewer resources to build and maintain highways.
Motor Vehicle Fuel Tax
Ohio’s motor vehicle fuel tax is a crucial revenue source for the state’s transportation budget, funding the construction, maintenance, and repair of highways and roads. This tax is applied to the sale of gasoline and diesel fuel, with rates periodically adjusted to meet the growing infrastructure needs. As of July 2019, Ohio increased its fuel tax to 38.5 cents per gallon for gasoline and 47 cents per gallon for diesel. This adjustment was aimed at addressing the funding shortfalls for critical transportation projects across the state, ensuring safe and efficient travel for residents and businesses alike.
Commercial Activity Tax (CAT)
The Commercial Activity Tax (CAT) is a tax on the gross receipts of businesses in Ohio. Unlike a corporate income tax, which is based on profits, the CAT is based on the total receipts of a business. Although it only contributes about 3.5% to the state’s revenues, the CAT is an important part of Ohio’s tax system, especially since Ohio does not have a corporate income tax.
