On February 2, 2015, Ohio Governor John Kasich released his “Blueprint for a New Ohio” in which he outlined budget goals for the 2016-2017 fiscal years. Continuing a trend from prior budgets, the plan calls for further reductions in the personal income tax rate, expansion of the small business deduction, revisions to the minimum commercial activity tax for businesses with less than $2 million in annual receipts, and increased personal exemptions for lower and middle income taxpayers. The reductions would be paid for in part by increases in the sales, cigarette and commercial activity tax rates, as well as a revamping of Ohio’s severance tax on oil and natural gas. Overall, the proposal claims a reduction of over $500 million over the two years.
Personal Income Tax
Current law contains a deduction for one-half of the first $250,000 for an individual’s net business income; this deduction applies to sole proprietors as well as to the owners of pass-through entities such as partnerships, S corporations, and limited liability companies. The budget proposes to exclude the first $2 million in net business income entirely from the tax and to apply the existing deduction to any remaining income.
Personal income tax rates will be reduced 15 percent during the first year of the budget, with an additional 8 percent reduction for the second year. The top personal income tax rate would be reduced from the current 5.33 percent to 4.1 percent over the two years.
The personal exemption for taxpayers earning less than $40,000 annually would be increased from $2,200 to $4,000 for 2015. For those earning between $40,000 and $80,000 annually, the exemption would increase from $1,950 to $2,850.
The plan also proposes to make some deductions and credits, such as the retirement income credit, the social security deduction, the $50 senior credit and the lump sum senior credit means-tested. Those items would be eliminated for taxpayers with annual income in excess of $100,000.
Commercial Activity Tax
The minimum tax for taxpayers with less than $2 million in annual taxable gross receipts would be reduced from $800 to $150. The rate of the tax would increase from 0.26 percent of annual taxable gross receipts to 0.32 percent of such receipts, an increase of roughly 23 percent.
The state sales tax rate will be increased from 5.75 percent to 6.25 percent. In addition, the tax base will be broadened by expanding it to a number of services. These include cable TV subscriptions, parking, lobbying, public relations, market research/opinion polling, management consulting, travel packages, and debt collection services. It is unclear whether this expansion is limited to personal purchases or will additionally apply to purchases by businesses.
Ohio currently reduces the price paid for a new car or boat by the value of any car or boat traded in. This reduction will be cut in half. Finally, the vendor discount, intended to reimburse vendors for the cost of collecting, reporting, and remitting the sales tax, will be capped at $1,000 monthly.
Currently, the severance tax is a volume-based tax, imposed on oil and gas at a rate of $.20 per barrel and $.03 per million cubic feet, respectively. Under the proposal, small, traditional producers would not be taxed at all. For larger producers using fracking wells, the tax would be imposed at a rate of 6.5 percent of the price of the oil or gas sold at the wellhead or 4.5 percent of the price paid downstream from the wellhead.
After providing for regulatory needs, 20 percent of the increased tax revenue would be earmarked for local jurisdictions to reimburse them for costs associated with the new drilling activities.
Overall Reduction in Taxes
The proposal is expected to result in a net reduction in taxes of $246 million in fiscal year 2016, and an additional $277 million in fiscal year 2017.
This information is based upon the summary released by the governor’s office. A proposed bill has not yet been introduced in the General Assembly for its consideration. Additional updates will be provided as information is made available.