The Ohio Senate recently unveiled its version of the state’s operating budget for the next two years. Like the two versions proposed by Governor Kasich and approved by the Ohio House, the Senate’s version of the bill results in a significant tax cut for Ohio taxpayers. The difference lies in the road traveled to achieve the reductions. Below is a summary of proposed tax changes in all three versions of the bill so far.
House Bill 64 as proposed
As proposed in House Bill 64, personal income tax rates would have been reduced 23 percent over two years. The top marginal rate would have been reduced from 5.3 percent to 4.1 percent of Ohio taxable income. The bill also proposed to exclude from the income tax small business income from any business with gross receipts up to $2 million.
As introduced, the bill also proposed to:
- Increase the commercial activity tax rate by 23 percent, from 0.26 percent of taxable gross receipts to 0.32 percent;
- Increase the state sales tax rate from 5.75 percent to 6.25 percent;
- Extend the sales tax to a number of services, including services such as public relations, lobbying, management consulting, research and public opinion polling, and debt collection;
- Increase the severance tax rate on oil, natural gas, and natural gas liquids produced through horizontal wells from the current levels of $0.20 cents per barrel of oil and $0.03 per MCF of natural gas (including liquids), to a rate of 4.5 percent or 6.5 percent of the average value of the oil, natural gas, or natural gas liquids produced; and
- Increase and equalize the various taxes imposed upon tobacco products, including e-cigarettes.
It was estimated that House Bill 64 would have reduced income taxes by a little over $5.7 billion, while increasing other taxes by about $5.2 billion, resulting in a net tax reduction of about $500 million for Ohio taxpayers.
Substitute Bill passed by the House
As introduced, House Bill 64 generated significant opposition, especially from business interests that would have borne the brunt of the tax increase provisions and enjoyed few of the income tax reduction benefits.
The House’s substitute bill provides for a 6.3 percent across-the-board reduction in income tax rates, reducing the top marginal rate to 4.997 percent. The proposal also makes permanent the small business tax deduction for 75 percent of the first $250,000 of business income earned by sole proprietors and the owners of pass-through entities. The substitute bill proposes to retain the provisions of House Bill 64 that imposed a means-test for some deductions and credits. This provision applies to the deduction for social security and railroad retirement benefits; the $50 senior credit; and the lump sum retirement credit. Taxpayers with annual income in excess of $100,000 would no longer be able to claim these deductions and credits.
The increases and other adjustments to the sales, commercial activity, severance and tobacco taxes are dropped from the substitute bill.
In addition to some other minor tax revisions, the substitute bill also:
- Continues to allow the historic preservation tax credit against the CAT;
- Provides a nonrefundable credit against the Petroleum Activities Tax for tax paid by another;
- Extends the enterprise zone program for two years, to October 15, 2017;
- Removes language creating the tax expenditure review committee to review tax expenditures over the next several years; and
- Makes technical changes to the jobs retention and jobs creation tax credits.
The proposal is expected to result in a net reduction in taxes of approximately $1.2 billion over the two fiscal years in the biennium.
Senate version of the bill
In the recently introduced bill, the Senate, like the House, wanted to provide for a significant income tax cut to Ohio taxpayers. It, too, proposes a 6.3 percent reduction in personal income tax rates. The bill also eliminates entirely the state income tax on the first $250,000 in net income from small businesses and imposes a new flat tax at a rate of 3 percent on such income in excess of $250,000. These changes would be effective for taxable years beginning on and after January 1, 2015.
The Senate version also removes a proposal by the House to means-test the exclusion of social security benefits from the Ohio tax base. Under the House-passed version, taxpayers with Ohio adjusted gross income greater than $100,000 would pay Ohio income tax on their social security benefits. That provision is absent from the Senate’s version of the bill.
The Senate proposes to increase the tax on cigarettes by $0.40 per pack. The tax on other tobacco produced would be increased from 17 percent to 22.5 percent. These increases would become effective July 1, 2015. The tax is not extended to e-cigarettes.
The Senate considered raising the sales tax rate but, in the end, declined to do so. Under its proposal, the state rate remains at 5.75 percent. Also absent from the Senate version is a revision to Ohio’s severance tax for oil and natural gas produced through hydraulic fracturing. However, talks continue between interested parties, and some provision could yet be added before final action by the Senate.
A number of other relatively minor changes are offered by the Senate. Those provisions include a temporary tax amnesty for certain taxes for 45 days in early 2016; new definitions for whether a seller has “substantial nexus” with Ohio in order to register, collect and remit use tax for out-of-state purchases transacted by Ohio consumers; and a requirement on hotel intermediaries to charge, collect and remit sales tax on the full price of hotel rooms charged to their customers.
The Senate proposal is estimated to cut taxes a net total of $1.7 billion.
The substitute bill will be introduced in the Senate Ways and Means Committee for its consideration. Amendments might be added either by the committee or by the full Senate. Unless the full Senate passes the bill as passed by the House, the competing versions will be referred to a conference committee for reconciliation. Both houses would have to approve a reconciliation, and the bill would need the signature of the governor in order to become law.
The current fiscal year ends June 30, and a new budget needs to be in place by July 1, 2015.