New Budget Bill in Place; Legislature Goes Home for Summer

The General Assembly passed and Governor Kasich signed the biennial operating budget, House Bill 59, on Sunday just in time for the close of the current fiscal year. The bill includes authorization for $121.13 billion (state and federal) in spending over the next two years for all state expenditures — from funding for state agencies to state support for local governments, schools and universities. House Bill 59 allows for nearly $10 billion more than was authorized for the FY 2012-13 biennium. In addition to the spending it authorizes, House Bill 59 also stands as one of the most significant policy bills the General Assembly will adopt this session. 

The budget season began in February of this year, when Governor Kasich proposed a series of sweeping policy changes.  His budget proposal included primary and secondary education funding reform, multiple proposals to cut and reform taxes, expansion of Medicaid coverage to low-income adults and higher education funding reform.  Of those four proposals, only higher education reform made it through the General Assembly without significant change.  The primary and secondary education funding proposals also still look much like what the governor proposed but with significantly more money added to the per-pupil funding formula than what was originally proposed — for a total of more than $700 million above the FY 2012-13 biennium. 

Despite significant support from a wide variety of witnesses, the final bill omits Governor Kasich’s proposal to expand Medicaid.  The bill instead authorizes the General Assembly and the Governor to continue to work on the issue — several bills have been introduced and Republicans in the legislature, the main opponents of the proposal, have said that they hope to achieve some type of Medicaid reform that could lead to some expansion.

The Governor’s tax reform proposals also were an early casualty in the legislature.  The bill leaves out Kasich’s proposals for raising energy extraction taxes and imposing the sales tax on most services.  Critics of both plans appeared early and often in the process and the House removed both from the bill.  However, the administration and the legislature were able to come to a last-minute consensus that saved much of the Governor’s proposed income tax cuts.  Ohio Office of Budget and Management Director Tim Keen stated that the new tax package is expected to provide a $2.7 billion net tax cut over the next three years.  The final bill includes, in part:

  • A reduction in income tax rates phased in over three years – for a total 10 percent cut in the rate;
  • A small business deduction of 50 percent up to $250,000 in income;
  • A 0.25 percent sales tax increase – taking the state sales tax from 5.5 percent to 5.75 percent;
  • A nonrefundable Earned Income Tax Credit, and
  • An increase in the tax on little cigars to the same level as cigarette taxes.

But the biggest change is to the Ohio Commercial Activities Tax (CAT).  House Bill 59 imposes new variable minimum tax amounts.  The minimum tax will be in addition to the current 0.26 percent on gross receipts over $1 million.  The new tiered tax would be applied to gross receipts as follows:

  • $150,000 to $1 million: $150.
  • $1 million to $2 million: $800 plus 0.26 percent on receipts over $1 million.
  • $2 million to  $4 million: $2,100 plus 0.26 percent  on receipts over $1 million.
  • More than $4 million: $2,600 plus 0.26 percent on receipts over $1 million.

The Senate concluded its debate on the bill first, with 21 voting to approve the bill and 11 voting against.  Senator Kris Jordan (R-Powell), a well-known opponent of taxes, voted with the 10 Democrat Senators against the bill.  Senator Peggy Lehner (R-Kettering) was absent and excused from voting because of a family medical issue.  The House also voted to approve of the budget, by a final vote of 53 to 44.  Seven Republicans joined the Democrats in voting against the bill: Representatives John Adams (R-Sidney), John Becker (R-Cincinnati), Ron Hood (R-Ashville), Matt Lynch (R-Chagrin Falls), Ross McGregor (R-Springfield), Kristina Roegner (R-Hudson) and Ron Young (R-Leroy). Representative Vernon Sykes (D-Akron), the ranking minority member on the House Finance Committee, was required to recuse himself from voting because of a conflict of interest and Representative Barbara Boyd (D-Cleveland Heights) was absent because of continuing health issues. 

Following the General Assembly’s passage of the bill, Governor Kasich had one last opportunity to put his stamp on the bill before signing it. Ohio’s governors have broad powers to veto individual items in spending bills and Governor Kasich used his veto to remove 22 items from the bill, including the language prohibiting the extension of Medicaid as well as the additional funding for nursing facilities. Also included among Governor Kasich’s vetos were two sales tax exemptions, the language requiring sales tax collection on internet sales with nexus in Ohio, the Workforce Development Program for the Economically Disadvantaged and changes to the language regarding changes to the “used and useful” standard for a natural gas company to recover environmental remediation costs.

With work on the budget bill done, legislators will return home until the session resumes in September.  However, many will continue to work on outstanding issues raised during the budget debate. Legislators will continue to work on Medicaid reform legislation throughout the summer.  And given Governor Kasich’s continued interest in reducing, if not eliminating, the personal income tax — whether through increased energy extraction taxes, a broadened sales tax or some other proposal — many expect tax reform to be an ongoing topic of discussion through the rest of the year.