The Ohio House has made significant changes to Ohio Governor John Kasich’s tax provisions contained in House Bill 64 of his proposed 2016-2017 fiscal year budget. In the face of persistent opposition to the many tax changes contained in the original bill, the House’s substitute bill has dropped many of the provisions that would increase taxes, while still providing for reductions in the personal income tax. Overall, the changes make way for an estimated $1.2 billion in income tax reductions over the two years of the budget.

House Bill 64 as Proposed

As proposed by Governor Kasich, House Bill 64 would have reduced personal income tax rates 23 percent over two years. The top marginal rate would have been reduced from 5.3 percent to 4.1 percent of Ohio taxable income. The bill also proposed to exclude from the income tax small business income from any business with gross receipts up to $2 million.

As introduced, the bill also proposed to:

  • Increase the commercial activity tax rate by 23 percent, from 0.26 percent of taxable gross receipts to 0.32 percent;
  • Increase the state sales tax rate from 5.75 percent to 6.25 percent;
  • Extend the sales tax to a number of services, including services such as public relations, lobbying, management consulting, research and public opinion polling, and debt collection;
  • Extend the sales tax to a number of services, including services such as public relations, lobbying, management consulting, research and public opinion polling, and debt collection;
  • Increase the severance tax rate on oil, natural gas and natural gas liquids produced through horizontal wells from the current levels of $0.20 cents per barrel of oil and $0.03 per MCF of natural gas (including liquids) to a rate of 4.5 percent or 6.5 percent of the average value of the oil, natural gas or natural gas liquids produced; and
  • Increase and equalize the various taxes imposed upon tobacco products, including e-cigarettes.

It was estimated that House Bill 64 would have reduced income taxes by a little over $5.7 billion, while increasing other taxes by about $5.2 billion, resulting in a net tax reduction of about $500 million for Ohio taxpayers.

Substitute Bill

As a result of significant opposition to the original bill, especially from business interests that would have borne the brunt of the tax increase provisions and enjoyed few of the income tax reduction benefits, the House made sweeping revisions in the substitute bill.

The House’s substitute bill provides for a 6.3 percent across-the-board reduction in income tax rates, reducing the top marginal rate to 4.997 percent. The proposal also makes permanent the small business tax deduction for 75 percent of the first $250,000 of business income earned by sole proprietors and the owners of pass-through entities. The substitute bill retains the provisions of House Bill 64 that imposed a means-test for some deductions and credits. This provision applies to the deduction for social security and railroad retirement benefits; the $50 senior credit; and the lump sum retirement credit. Taxpayers with annual income in excess of $100,000 would no longer be able to claim these deductions and credits.

The increases and other adjustments to the sales, commercial activity, severance and tobacco taxes are dropped from the substitute bill.

In addition to some other minor tax revisions, the substitute bill also:

  • Expands the real property tax exemption for property owned by nonprofit fraternal organizations;
  • Sets a fixed date of June 15 for the payment of the domestic insurance tax and changes the penalty for delinquent payments to $500 per month, rather than a percentage of the liability;
  • Provides that a company that generates electricity but donates all the electricity to a political subdivision is not subject to the kilowatt hour or public utility personal property taxes;
  • Continues to allow the historic preservation tax credit against the CAT;
  • Provides a nonrefundable credit against the Petroleum Activities Tax for tax paid by another;
  • Extends the enterprise zone program for two years, to October 15, 2017;
  • Removes language creating the tax expenditure review House to review tax expenditures over the next several years; and
  • Makes technical changes to the jobs retention and jobs creation tax credit.

Overall Reduction in Taxes

The proposal is expected to result in a net reduction in taxes of approximately $1.2 billion over the two fiscal years in the biennium.

Tax Policy Study Commission

The substitute bill calls for the creation of yet another body to study Ohio’s tax structure. The Ohio 2020 Tax Policy Study Commission is charged with taking a larger, more comprehensive look at Ohio’s tax structure in comparison with other states. The Commission is to report its findings and recommendations by October 1, 2017, at which time it shall cease to exist. It is to use “dynamic analytical tools” in making its findings and recommendations.

Summary

The substitute bill provides for a reduction in personal income taxes for many taxpayers, albeit the reduction is lesser in comparison with that contained in the original bill. The many provisions that would increase other taxes, however, have been removed. The result is a greater total tax decrease across all taxpayers in the state.

The substitute bill now moves to the Senate for its consideration. Early signals are that the Senate does not feel constrained by the tax provisions contained in the bill either as introduced on behalf of the Administration or as passed by the House.

A budget bill must be enacted and signed before the beginning of the next fiscal year on July 1, 2015.