On March 11, 2014, Gov. Kasich’s administration unveiled its second mid-biennium review budget bill (MBR). The bill, introduced as H.B. 472, highlights six major areas of interest for the administration, but includes many new policy and appropriation items. On Wednesday, March 12, Ohio House of Representatives Speaker William Batchelder indicated that it is the House’s intent to divide the MBR into at least 11 bills, which would then be sent to committees for hearings.
In the area of taxation, the centerpiece of the proposal is an 8.5 percent reduction in personal income tax rates — to drop the top income tax rate below 5 percent — implemented over three years, coupled with government savings and increases in tobacco, commercial activity, and severance taxes to help pay for the reduction in tax rates.
The bill proposes to cut income tax rates across the board by 8.5 percent over three years, beginning with calendar year 2014. The top rate would be reduced as follows:
- CY 2014 – 5.203 percent
- CY 2015 – 4.960 percent
- CY 2016 – 4.880 percent
In August of each year, the income levels to which the rates apply are to be adjusted for inflation.
In an attempt to provide additional reductions to persons at the lower end of the income spectrum, the earned income tax credit in R.C. 5747.71 would be increased from 5 percent of the federal earned income tax credit to 15 percent beginning in 2014, although the credit remains nonrefundable. The personal exemption would increase from $1,700 to $2,700, for persons with Ohio adjusted gross income less than $40,000; and from $1,700 to $2,200, for persons with Ohio adjusted gross income between $40,000 and $80,000. The exemption remains at $1,700 for persons with Ohio adjusted gross income in excess of $80,000. Beginning in 2016, these amounts will be adjusted annually for inflation.
The Legislative Service Commission (LSC) estimates that the reduction in rates will reduce income tax revenues by $310 million in tax year 2014; by $639 million in tax year 2015; and by $811 million in tax year 2016. For fiscal years 2015, 2016 and 2017 the amounts are slightly higher, at $461 million, $816 million, and $909 million, respectively.
The increase in the personal exemption amounts is expected to reduce revenues by $142 million in fiscal year 2015 and by comparable amounts in subsequent years.
The increase in the earned income tax credit is estimated to reduce revenues by $29.9 million in fiscal year 2015; and by $31.4 million in fiscal year 2016.
In addition to the tax increases discussed below, this reduction will be paid for in part by savings realized through lower than budgeted borrowing costs and lower than expected homestead reimbursement payments.
Uncodified law provides these provisions take effect with tax year 2014.
Commercial Activity Tax
To help offset the income tax cut and EITC increase, the commercial activity tax (CAT) rate will be increased from 0.26 percent to 0.3 percent of taxable gross receipts (an increase of 15.38 percent). Uncodified section 812.20 provides that this change is not subject to referendum and therefore will go into immediate effect upon the signing of the bill, while uncodified section 803.81 provides the provisions take effect July 1, 2014. The minimum tax is unchanged from last year’s legislation that phased out the exemption on the first $1 million of taxable gross receipts. Uncodified section 757.20 permits the holder of a rehabilitation tax credit certificate issued under R.C. 149.311 to claim a credit against the CAT for tax periods ending on or before June 30, 2015, provided the holder is unable to use the credit against other taxes.
LSC estimates the increase in the tax rate will increase CAT revenue by $216 million in fiscal year 2015, and by $226 million in fiscal year 2016. The fiscal impact of the credit is undetermined.
By far the most significant changes are made to the severance tax. The severance tax on traditional, vertical wells is increased to $.20 per barrel of oil, and $.03 per thousand cubic feet (MCF) of natural gas (the assessment fee imposed by R.C. 1509.50 is repealed). R.C. 5749.02(B) is amended so that a new tax is imposed upon the “privilege of engaging in the severance of oil and gas from the soil or water of this state using a horizontal well.” The new tax is imposed at a rate of 2.75 percent on the gross receipts of a severer of oil or natural gas on or after July 1, 2014. The gross receipts means the total amount received by a severer without any deduction from the first sale of oil or gas severed through the use of a horizontal well made at arm’s length. If the sale is not arm’s length, then the tax is based on specified spot prices certified by the tax commissioner under new R.C. 5749.02(E) for the preceding year, multiplied by the quantify of such oil or gas.
Gas from a gas well that is not a horizontal well is exempt from taxation if the production from the well does not exceed 910,000 cubic feet per quarter, or 3,640,000 cubic feet per year if the severer is required to file returns annually.
There is a three-year cost recovery period for oil or natural gas severed through use of a horizontal well. In year one, the first $4 million in receipts are not taxed; in years two and three, the first $3 million and $1 million, respectively, are not taxed.
A comprehensive distribution of the proceeds from the tax imposed upon oil or gas severed through the use of a horizontal well is provided in R.C. 5749.02(C)(7). The first proceeds from the tax are devoted to regulatory activities in amounts certified annually by July 1 by the director of budget and management as needed for oil and gas regulation, geological mapping, and plugging idle and orphaned wells. The remaining amount is divided quarterly as follows:
- 10 percent to the severance tax fund of each county;
- 5 percent to the severance tax infrastructure fund;
- 5 percent to the severance tax endowment fund; and
- 80 percent to the state general revenue fund.
LSC estimates that the increase in the severance tax will raise between $29 and $80 million during fiscal year 2015, and between $41 and $144 million in fiscal year 2016.
These provisions are all effective for oil and gas severed on and after July 1, 2014.
The tax on cigarettes will be increased 30 cents per pack during each of fiscal year 2015 and 2016. In addition, the tax imposed on tobacco products is imposed at a rate of 41 percent of the price during fiscal year 2015, and at 49 percent of the price during and after fiscal years 2016. E-cigarettes will be subject to tax as a “tobacco product.”
R.C. 5743.03(D) and (H) are amended so that cigarette stamps are purchased from the tax commissioner, rather than the treasurer of state. Conforming amendments are made to other sections of R.C. Chapter 5743 as well.
LSC estimates that these tobacco tax increases will raise a total of $226 million in fiscal year 2015 and $286 million in fiscal year 2016.
These changes are effective with respect to invoices dated on or after July 1, 2014.
Total Revenue Changes
In total, for fiscal year 2015, the LSC projects an income tax reduction of about $902.9 million, and increases in the other taxes of between $471 million and $522 million, for a net reduction of between $380 million and $431 million. For fiscal year 2015, the income tax reduction is projected at $989.4 million, while the increase in the other taxes is estimated at between $553 million and $656 million. This results in a net reduction of between $333 million and $436 million. For fiscal year 2017, the income tax reduction is estimated at $1,051 million; no estimate of the increases in the other taxes was provided.
K-12 and Higher Education Summary
Miscellaneous K-12 Proposals
The MBR proposes various changes to various miscellaneous K-12 education provisions in the Ohio Revised Code, including changes relating to the Kindergarten assessment, academic distress commissions, installment payment contracts for energy conservation measures, a newly required career advising policy, “student success plans” for students at risk of dropping out, early college high school programs, waivers for dropout prevention and recovery programs, the development of rules for renewal of resident educator licenses, and encumbrances for Straight A Fund grants. A career advising and mentoring grant program would also be established.
The MBR proposes expanding career-technical education offerings to seventh and eighth graders except where a waiver is obtained from the Ohio Department of Education. It proposes language regarding pre-apprenticeship programs offered by agreement with private entities. The bill also would create an “adult career opportunity pilot program” that would assist adult students in obtaining a high school diploma, with $2.5 million being allocated for that program.
College Credit Plus Program
The MBR proposes to recast the current Post-Secondary Enrollment Options (PSEO) program into the College Credit Plus program and makes changes relating to recommendations made by the Ohio Board of Regents in a report released earlier this year. The proposed changes include the ability of schools and colleges to obtain waivers from the new requirements. Note that under the current proposal, the PSEO program would remain in effect for the 2014-2015 school year and the College Credit Plus program would not begin until 2015-2016.
The MBR also requires, starting in the 2014-2015 school year, that each school district adopt policies on career advising. These plans must provide grade-level examples for students that link school work to career fields, interventions and career advising for at-risk students to prevent dropouts, multiple academic pathways to graduation, identification of coursework in both traditional academic and career-technical paths, and remediation in mathematics and English as part of the transition from high school to post-secondary education. The bill requires identification of students at risk of dropping out of school and implementation of a student success plan to address a student’s path to graduation.
The bill sets up a mechanism to allow a school district to provide career-technical education to students in grades seven and eight, including offering pre-apprenticeship and apprenticeship programs.
Dropout Prevention and Recovery
The bill addresses dropout prevention and recovery by requiring dropout prevention and recovery programs to submit to the Department of Education policies on career advising detailing how students will receive career advice as well as an outline describing cooperation between the program and local job training, postsecondary education, nonprofit, and health and social services organizations to provide services to students and their families. These would apply to programs seeking to apply for a waiver so that students enrolled in the dropout prevention and recovery program may qualify for graduation from high school by completing the program in lieu of the traditional Ohio core curriculum. These enhanced requirements only apply to waivers granted on or after the effective date of the legislation.
With an eye on helping high school students earn college credits while still finishing their high school degree, the MBR renames “dual enrollment” programs as “advance standing” programs, which include advanced placement courses, international baccalaureate courses, early college high school programs, and post-secondary enrollment options — the College Credit Plus program mentioned above.
The program enrollment under the “dual enrollment” system indicated that only a fraction of those eligible actually participated. Proposed changes to the new dual-credit program are expected to:
- Create simpler and more fair funding mechanisms for high schools and higher education institutions
- Establish a system-wide data collection and reporting system
- Increase participation among eligible students
- Improve student achievement and course quality
The bill delays the implementation of requirements of the College Credit Plus program for an existing early college high school program until July 1, 2015, or the expiration of the existing agreement.
In addition, the MBR emphasizes technology and distance learning for adult learners.
With tuition rates rising, the MBR includes a provision to help make Ohio’s four-year colleges more affordable. The program gives students and their parents the opportunity to select a guaranteed rate for the duration of their time at school.
The MBR proposes to credit military training and experience for veterans working toward their college degree. The Military Transfer Assurance Guide would provide a guideline for colleges and universities in providing consistent college credit for military service.
In addition, the MBR proposes a series of changes that would provide assistance to veterans, facilitate distance learning programs, affect State Share of Instruction funding, and establish a statewide course and program sharing network.
As the state continues to focus on creating an economic environment that facilitates job growth and creation, the MBR has several components geared at enhancing those efforts. The bill proposes to combine the three federal programs listed below into one integrated plan to improve efficiencies and results.
- Adult Basic Literacy Education (ABLE)
- Carl D. Perkins Center and Technical Education Act (Perkins)
- Workforce Investment Act (WIA)
Placing Veterans Back in the Workforce
The MBR contains several provisions aimed at assisting servicemen and women, and their spouses, with acquiring employment. Among the changes included in the bill is a provision adding to the list of duties of the Director of Veterans Services the responsibility to coordinate with other agencies to deliver information about professional and occupational licensing, certification and other authorization for employment as well as outreach about job and education benefits. The director is also charged with enhancing website information about licensing, certification, job opportunities and education benefits.
In addition, licensing agencies must establish and implement procedures specific to veteran applicants. This includes prioritizing and expediting certification and licensing for veterans and their spouses as well as prohibiting fees or other penalties for an expired license renewal if the lapse was due to service in the armed forces.
Health and Human Services Summary
The MBR includes provisions for mental illness crisis intervention and addiction in the form of temporary housing in times of crisis. It also includes a drug abuse prevention campaign called “Start Talking.”
Keeping with the Gov.’s promise in his State of the State Address, the bill also includes a $26.9 million tobacco cessation allocation from the master settlement agreement for tobacco prevention and cessation programs.
Finally the bill establishes the Office of Human Services Innovation to help human service agencies coordinate and reform state programs to address poverty issues throughout Ohio. Housed within the Department of Jobs and Family Services, the new Office will also get support from the Superintendent of Public Instruction, the Chancellor of the Board of Regents, and the Directors of the Offices of Workforce and Health Transformation.
Economic Development Summary
Incentive Requirements and Compliance
The MBR would establish August 1 as the uniform due date for reporting by recipients of state assistance through the Development Services Agency, the Ohio Venture Capital Authority, Third Frontier Commission and the Ohio Coal Development Office. Additionally, the MBR would require businesses seeking research and development financial assistance in connection with a relocation to notify local governments that will be affected by their relocation before entering into an agreement with the state for the assistance.
In the event that the recipient of a Research and Development Loan Tax Credit fails to comply with certain requirements related to its state assistance, the MBR would authorize the Development Services Agency to reduce the amount, percentage and term of the tax credit. Finally, the MBR would authorize the Development Services Agency to access Department of Taxation information as necessary to verify information provided by incentive recipients and to ensure compliance with tax laws.
Job Creation Tax Credit Computations
The MBR would reduce the value of certain job creation tax credits (JCTCs) during their first year. Under continuing law, the value of a tax credit is equal to the income tax base revenue in the year at issue, minus the baseline income tax revenue in the twelve months before the Tax Credit Authority approves the project, multiplied by the tax credit percentage established by the Tax Credit Authority.
The MBR would eliminate a provision in current law providing that the baseline income tax revenue in the first year of the tax credit is to be reduced in proportion to the number of days in the year prior the tax credit in which the tax credit recipient was not eligible for the tax credit. By eliminating this provision, the MBR would reduce the value of tax credits in their first year so that they will be based on the growth in income tax revenue for that year.
Municipal Tax Credits
The MBR clarifies that municipalities can offer JCTCs and job-retention tax credits to employers regardless of whether the employers also receive tax credit assistance from the Development Services Agency.
Energy and Natural Resources Summary
ONDR’s Authority Over Land
R.C. 1501.01 of the MBR proposes to limit the director of the Ohio Department of Natural Resources’ (ODNR) authority to sell, lease, exchange land, or enter into agreements for the sale of water from lands and water, to an amount less than one million dollars. Any amount above $1 million would require the Gov.’s approval. Further, R.C. 1509.99 would increase the penalties for violations of oil and gas operations.
Energy Performance Contracts
Under current law, the state of Ohio is permitted to enter into energy performance contracts on behalf of state agencies and institutions of higher education. This authority to contract is vested in the Ohio Facilities Construction Commission (OFCC) or the board of trustees of the institution of higher education. Similarly, the authority to contract with a school district resides with the school district’s board of education. There are projects that require schools districts to maintain and annually update a report that documents the reductions in energy consumption and resultant operational maintenance cost savings attributable to installations, modifications or remodeling.
The MBR proposes that R.C. 133.06 now require the report to be “in a form and manner prescribed by the school facilities commission.” However, the report would no longer have to be certified by an independent architect or engineer. R.C. 133.06 further proposes that if OFCC verifies that the annual reports satisfy the guarantee for three consecutive years, the board of education will no longer be subject to the annual reporting requirements.
Finally, school districts are currently required to competitively bid these projects, but may opt out of competitive bidding with a supermajority of the board of education. The MBR proposes in R.C. 3313.372 that if a school district opts out of competitive bidding, then the school district must award the contract “through a competitive selection process pursuant to rules adopted by the [OFCC].” R.C. 3313.372 goes on to provide that installment payment contracts may include services for measurement and verification of energy savings associated with the guarantee, so long as the cost of those services do not exceed ten percent (10%) of the guaranteed savings in any year of the installment payment contract.
Provisions for the Public Utilities Commission of Ohio (PUCO)
The MBR includes several proposed provisions with respect to utilities including the following:
- R.C. 4905.81 proposes that the PUCO regulate intermodal equipment providers, as defined under 49 C.F.R. 390.5, which govern federal motor carrier safety regulations;
- R.C. 4905.95 proposes that the PUCO be permitted to assess operator pipeline compliance forfeitures not more than $200,000 for each day of each violation or noncompliance, an increase from $1,000 and up to $2 million for any related series of violations or noncompliance (an increase from $1 million);
- New provision R.C. 4909.157 would empower the PUCO to authorize natural gas companies or gas companies to recover environmental remediation costs for property that was formerly the site of a manufactured gas plant and owned by the company or a predecessor in interest before July 1, 2014; and
- With respect to implementing energy efficiency programs, R.C. 4928.66 proposes to now allow electric distribution utilities to apply more than the total annual percentage of the electric utility’s industrial customer load, relative to the electric distribution utility’s total load, to the annual energy savings requirement, for purposes of waste energy recovery or combined heat and power systems.li>
Diesel Emissions Reduction
Established under the Highway Operating Fund, the Diesel Emission Reduction Grant Program is administered by the Director of Environmental Protection to solicit, evaluate and select projects eligible for the federal Congestion Mitigation and Air Quality (CMAQ) program. It is also used to fund projects involving the purchase and use of hybrid and alternative fuel vehicles as allowed under the Federal Highway Administration guidance for CMAQ programs.
Appropriations made in H.B. 472 for Diesel Emissions Reduction Grants are $10 million for fiscal year 2014 and $2.5 million for fiscal year 2015. The 2015 total is a reduction to one-quarter the amount allocated in last year’s state operating budget.
At more than 1,600 pages, the MBR is a policy and appropriation tour de force. In the coming weeks and months, however, many legislators will have the opportunity to leave their mark on the bill as it moves through the legislative process. While many of the core concepts in the bill will likely remain the same, there will undoubtedly be major changes in the details of the MBR. Stay tuned for more updates and analysis from Bricker & Eckler’s team over the next several months.