On February 4, 2013, Ohio Governor Kasich revealed the broad parameters of his proposed budget for the 2014-2015 fiscal years. On the tax front, the proposal includes a 20% reduction in all personal income tax rates; a 50% exclusion from income for owners of pass-through entities; an extension of the sales tax to virtually all services, with a modest reduction in the state and local sales tax rates; and an increase in the severance tax applicable to persons extracting oil and gas using horizontal drilling.
Personal Income Tax
The governor proposes to cut all personal income tax rates a total of 20% over three years. For calendar year 2013, the rates would be reduced 7.5%; for calendar year 2014, all rates would be reduced an additional 7.5%; and in calendar year 2015, a third reduction of 5% would also be made. The lowest marginal rate would be reduced from 0.587% to 0.470%, while the top marginal rate would be reduced from 5.925% to 4.74%.
In addition, the owners of a small business organized as a pass-through entity (i.e., partnership, LLC, S corporation) would receive a deduction of one-half of the net income received from the entity as a reduction. It appears that the deduction is limited to the first $750,000 of net income received by each owner. However, it is unclear whether this cap applies to each individual owner or whether it applies to the entire net income from a single entity.
The budget proposes to change fundamentally the manner in which services are subject to the sales tax. Currently, it is presumed that services are not taxable and only specifically enumerated services are subject to the tax. Under the proposal, this structure will be reversed. All services would be subjected to the tax unless specifically exempted.
Services considered “necessities of life” will be exempt from the tax. Such services include health care, construction, residential rentals, education, social assistance, day care, insurance premiums, and trash removal. Professional services such as legal, accounting, engineering, architecture, marketing, lobbying and research; administrative and support services such as collection or credit ratings; financial and real estate services; and arts, recreation, entertainment, and other admissions-type transactions, will all become taxable.
The state tax rate would be reduced from 5.5% to 5.0%. Local tax rates would be reduced by means of a complicated formula that would largely negate any windfall provided by the expansion of the tax base. However, the rates would be adjusted to permit a roughly 10% increase in revenue to any entity imposing a local tax. Between October 2013 and June 2016, no new additional local taxes may be imposed, as the rate adjustment is calculated and refined.
Reprising the proposal that was made during 2012, but which was not enacted, the budget proposes to increase the severance tax associated with the use of horizontal wells to produce oil and gas from shale formations in the state. The changes are summarized in the following chart:
Click here to view chart.
Revenue from the increased tax will be directed to the general revenue fund to offset some of the income tax reductions.
This proposal reflects a policy decision to shift Ohio’s revenue sources from income and investment to consumption. Although cast as an overall tax decrease (annual income tax revenues are expected to drop $2.73 billion once the rate reductions are fully phased in), the expansion of the sales tax base is anticipated to result in an annual revenue increase the net of the reduction in state tax rates of roughly $1.848 billion.
This information is admittedly broad and a number of questions remain. Additional changes may also be proposed. As details become available and specific language in the form of a bill becomes available, additional analysis will be possible.