On Tuesday June 25, the house and senate conference committee held hearings and 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 non-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credit and the low income tax credit that effectively provides an exemption for the first $10,000 of earned income are repealed.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.
Commercial activity tax
Currently, all taxpayers with annual taxable gross receipts of less than $1 million pay only the $150 minimum tax. Taxpayers with taxable gross receipts in excess of $1 million are subject to tax at the 0.25 percent rate on those receipts, plus the $150 minimum tax. The bill establishes a graduated minimum tax based upon the total gross receipts of the taxpayer. Taxpayers with taxable gross receipts of $1 million or less will continue to pay the $150 minimum tax. For taxpayers with taxable gross receipts greater than $1 million, but less than or equal to $2 million, the minimum tax is $800. For taxpayers with taxable gross receipts greater than $2 million, but less than or equal to $4 million, the minimum tax will be $2,100. For taxpayers with taxable gross receipts greater than $4 million the minimum tax is $2,600.
This proposal adds a wrinkle of complexity to a tax that was a model for simplicity. The proposal phases out the exclusion for the first $1 million of taxable gross receipts each year, depending on the taxpayer’s annual taxable gross receipts for that year. The minimum tax is also graduated as taxpayers have annual taxable gross receipts between $1 million and $4 million. For taxpayers with taxable gross receipts in excess of $4 million, this will mean a tax increase of $2,450 annually.
There also appears to be a compliance glitch in the approved language that may create problems. As noted, the proposal phases out the $1 million exemption and graduates the minimum tax based on the annual taxable gross receipts of the taxpayer. However, the bill requires the taxpayer to pay the minimum tax annually by May 10 of the calendar year. At that point, a taxpayer may not know what it annual taxable gross receipts will be, and may not be able to determine accurately what its minimum tax liability is.
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 attain age 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 will be eliminated. The addition 2.5 percent exemption for owner-occupied residential property will also be eliminated. Existing and renewal levies will not be affected and 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.
Effective January 1, 2014. 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 proposal continues the effort to move Ohio away from taxing income in favor of taxing consumption. It is claimed that the bill also increases 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 chambers must concur in the changes before the bill can be sent to the governor for his signature.