The Ohio budget negotiation is coming to a close, as the Senate has recently passed HB 64, which contains a variety of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. measures. The centerpiece of the tax package is a 6.3 percent across-the-board income tax cut, with a 100 percent deduction for the first $250,000 in income for pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es like LLCs, S-corporations, and sole proprietorships. Additional income above $250,000 is taxed at a flat 3 percent rate.
Other provisions of the package would (coverage via State Tax Notes):
- “increase the cigarette tax by 40 cents per pack;
- provide that a municipality's hotel tax must be calculated based on the total price paid by the consumer for lodging;
- allow a publicly traded partnership that is treated as a partnership for federal income tax purposes to be treated as a C corporation for municipal income tax purposes, if the taxpayer is subject to a tax on its net profits in more than one municipality;
- provide for the creation of tourism development districts that can impose a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. of up to 2 percent of gross receipts; and
- require additional reporting on tax incentives.”
Because the budget package has changed between the House and Senate, it is now headed for a conference committee for reconciliation. The Columbus-based Buckeye Institute today put out a handy report titled, Keep, Change, Cut: Guideposts for the Budget Conference Committee, which offers some good guidance for the conference committee to consider. Their input on some of the tax measures:
Severance Tax: Both the House and Senate budgets remove the Governor’s proposal to increase the severance tax on shale oil and gas drilling. The Governor’s severance tax is anti-growth, and violates the principle of tax equity by singling out one enterprise for extra taxation. The General Assembly was right to reject it. Energy is like anything else—when you tax it, you get less of it. When oil and gas companies produce less energy, the price of energy rises. And when energy prices climb, Ohio’s economic growth falls, because businesses and families have less to spend on hiring new employees or paying for college. A higher severance tax is harmful to prosperity, because a higher tax threatens jobs in Ohio.
Personal Income Tax: The Governor’s budget contains the most substantial personal income tax cuts, lowering rates in all brackets by 23% by 2017. The House and Senate versions only cut tax rates by 6.3% —an improvement but not enough. The Governor’s and the Senate’s budget proposals include exemptions for business income. These provisions would allow workers to style themselves “independent contractors” and avoid 75-100% of their tax liability. Replacing the small business exemptions with larger across the board personal income tax cuts would be a sound tax strategy.
Tax Shifting: The House and Senate budgets do not offset income tax cuts by increasing other harmful taxes. The Governor’s proposal, however, would increase the Commercial Activity Tax (CAT) and cigarette taxes—neither of which is a good idea. CAT increases will make Ohio less attractive to businesses, and cigarette tax hikes will make Ohio more attractive to black market smugglers. Unfortunately, the Senate budget also includes a smaller cigarette tax increase as well as a new tax on hotel intermediaries that likely will harm Ohio tourism. Tax shifts like these are bad policies that hurt economic growth.
Tax ExpenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. Review: The Senate budget creates a joint “tax review expenditure committee.” This bipartisan committee will include members from both the House and the Senate. The committee will review existing tax expenditures—or “tax loopholes”— in the Ohio Revised Code, and make recommendations for reform accordingly. Such “loopholes” effectively make tax rates higher on items still subjected to the tax. A committee to review and remove expenditures that have outlived their usefulness is a small step towards better tax policy. Closing tax loopholes could generate revenues that can be used for more robust income tax reform. The best tax policy is having the lowest possible rates and preventing tax loopholes from benefitting special interests.
If you’ve been following the blog, you know that we’ve been very involved in Ohio this session. Here are some links to our previous analysis:
Forbes Column: Gov. Kasich's Plan May Be a Tax Cut, But It's Still Poor Policy (Jan. 30)
Legislative Testimony: Suggestions for Improvement in the Ohio FY 2016-17 Budget (Mar. 4)
Blog: Ohio House Markedly Improves on Gov. Kasich's Budget Plan (Apr. 21)
Forbes Column: Ohio Senate Mulling Tax Changes, Good And Bad (Jun. 17)
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