On Thursday June 20, the house and senate conference committee held a press conference at which it released its proposed resolution of the tax differences in House Bill 59, the budget bill for the 2014-2015 biennium, as passed by the two chambers. The entire proposal is expected to result in a net tax decrease of 10 percent over three years, or $2.6 billion.
Under the proposal, all personal income tax rates are reduced by 10 percent over three years. For tax years beginning in 2013, rates will be reduced 8.5 percent. For tax years beginning in 2014, the reduction in rates will be 9 percent compared to existing rates. For tax years beginning in 2015 and thereafter, the full reduction of 10 percent will be in place. The adjustment in rates due to inflation will be suspended for those three years. These rate reductions are expected to reduce income taxes by $3.2 billion over the three years.
In addition, the so-called small business tax deduction for the owners of pass-through entities is capped at one-half of the first $250,000 in business income, rather than one-half of the first $750,000. It is thought that 98 percent of all small businesses will be able to take advantage of this reduction. This small business deduction is expected to reduce taxes by a little more than $500 million annually.
Beginning January 1, 2013, new R.C. 5747.71 provides for a refundable earned income tax credit equal to 5 percent of the federal earned income credit. If the taxpayer’s annual income exceeds $20,000 after applicable exemptions, the credit may not exceed 50 percent of the tax due. The $20 per person tax credit and the low income tax credit that effectively provides an exemption for the first $10,000 of earned income are repealed.
The income tax deduction for gambling losses is eliminated under the proposal.
Real Property Tax
R.C. 323.152 currently provides a homestead exemption of 2.5 percent for owner-occupied residential property owners who are totally disabled or at least 65 years old. This credit applies regardless of the owner’s income level. Persons who currently qualify for the exemption will be unaffected, but the bill changes the credit so that persons who are not yet old enough to qualify for the credit will be means-tested when they turn 65. Owners with annual incomes above $30,000 will not be eligible for the exemption. This threshold is indexed for inflation. Individuals applying for the reduction will also have to permit the county auditor to examine any financial records relating to income earned by the applicant.
With respect to new or replacement levies imposed after the bill becomes effective, the 10 percent property tax rollback for residential and agricultural property provided by R.C. 319.302 and the addition 2.5percent exemption for owner-occupied residential property will be eliminated. Existing and renewal levies will not be affected and will remain subject to the 12.5 percent reduction; such levies are referred to as “qualifying levies” in the bill.
These changes are to be effective with the 2014 calendar year.
The state sales and use tax rates will be increased by one-quarter of one percent, from 5.5 percent to 5.75 percent. Ohio will become a full member in the Streamlined Sales Tax Initiative so that it may be able to collect more use tax from remote sellers. This provision, which relates to tax that is currently due, but is uncollected, is expected to generate roughly $20 million annually in new revenue.
The sale of “specified digital products” will become taxable. Such products include digital audiovisual and audio works, and books delivered electronically. “Specified digital products” does not include cable service or video programming. The existing exemption for magazine subscriptions is repealed.
Commercial Activity Tax
Currently, a taxpayer with annual taxable gross receipts of less than $1 million pays only the $150 minimum tax. The threshold is dropped to $500,000, so that taxpayers with annual taxable gross receipts between $500,000 and $1 million will also pay the tax associated with the 0.26 percent rate. Taxpayers currently paying the CAT on annual receipts in excess of $1 million will see a tax increase of approximately $1,300 as a result of this change. Other taxpayers with annual taxable receipts in excess of $500,000 will see a smaller increase.
So-called little cigars will be taxed in the same manner as cigarettes. This will result in a slightly higher tax on those products. This change would be effective January 1, 2014.
This proposal continues the effort to move Ohio away from taxing income, towards taxing consumption, and increasing tax transparency with respect to the elimination of the real property tax roll-backs on new levies. According to a press release issued by the House and Senate majority caucuses the net tax change over three years looks like this:
Click here to view table.
Both the house and the senate are expected to hold hearings on the proposal prior to action by both chambers to concur in the changes.