Tax News Update    Email this document    Print this document  

On January 30, 2017, Governor John Kasich released the framework of his proposal for Ohio's budget for fiscal years 2018 and 2019. The proposal reflects Governor Kasich's continued commitment to reducing Ohio Individual Income Tax rates; further personal income tax rate reductions, however, present a greater challenge in this budget cycle due to federal rules resulting in the elimination of the Ohio sales tax on Medicaid managed care plans. The general fund revenue effect of eliminating this tax is estimated to be approximately $1.1 billion for the biennium with another $400 million in estimated revenue losses to county governments. The Governor also has proposed increasing the sales and use tax rate and expanding the tax to certain services that are currently not subject to the tax. He also recommended additional changes to Ohio's Municipal Income Tax system that will surely be the subject of intense discussions as the legislative process moves forward.

The following summarizes the tax changes proposed by the Governor:

Individual income tax

The proposal would reduce individual income tax rates by 17% over the biennium with the highest marginal rate moving from 4.997% to 4.33%. The number of brackets would also be reduced to five from the current nine. Personal exemptions would be increased for certain taxpayers, with the low income tax credit threshold increased to $15,000 from $10,000. The expected revenue decrease from these proposals is approximately $3 billion¹ over the biennium.

Sales and use tax

The statewide sales/use tax rate would increase from 5.75% to 6.25%, increasing state revenues by approximately $1.5 billion over the biennium. Like many other states, Ohio allows its political subdivisions to assess an additional local rate on top of the statewide rate. The increase in the statewide rate alone would drive the highest combined state/county sales and use tax rate (Cuyahoga County) from 8% to 8.5%.

In past years, Governor Kasich proposed radically expanding Ohio's sales and use tax base to encompass most services.² This cycle's proposal would expand the tax base to make the following services taxable: lobbying, repossessions, cable subscriptions, landscape design, non-medical cosmetic surgery, interior design, interior decorating and travel agency services. The expected revenues to be added for the budget cycle are approximately $340 million. These are merely proposals. Taxpayers are advised to carefully review the definitions relating to these services when the legislative language is introduced. For example, in a prior proposal, the term "lobbying services" was defined very broadly,³ raising concerns that it reached beyond lobbying services and to other administrative controversy and advocacy services before state agencies.

Commercial Activity Tax

The proposal continues to hold the line on the rate of the Commercial Activity Tax (CAT) at 0.26% on gross receipts over $1 million. The CAT rate has been unchanged since enactment of the tax in 2005. The proposal, however, would change the CAT treatment of suppliers to a qualified distribution center (QDC). Currently, such suppliers pay CAT based on an Ohio delivery percentage for the QDC that is certified annually. The proposal would require suppliers to QDCs to pay CAT based on a minimum floor of 10% of gross receipts from shipments to those locations. The current exclusion for interest would be eliminated on interest earned by taxpayers engaged in lending. The proposal estimates that these changes would increase revenues by approximately $33 million over the biennium.

Severance tax

Governor Kasich also proposes would imposing a new tax on gross receipts from horizontal wells at a rate of 6.5% on oil, condensate and natural gas and 4.5% on natural gas liquids and other processed hydrocarbons. This is estimated to generate additional revenue of approximately $450 million over the biennium.

Sin taxes

The tax on cigarettes would increase from $1.60 to $2.25 a pack under the proposal. The tax rate on other tobacco products (e.g., specialty cigars) would increase from 17% to 69% with the intent of equalizing the tax burden with that imposed by Ohio's cigarette taxes. Cigarette stamp tax credits and other tobacco product (OTP) vendor discounts would be reduced and a tax on other vapor products would be adopted. Finally, alcohol-related taxes would also be increased. These changes are estimated to increase revenues by approximately $720 million over the biennium.

Municipal income taxes

The Governor's proposal would centralize collection and some administration of municipal net profits taxes (i.e., imposed by Ohio municipalities on entities doing business within their jurisdiction) within the Ohio Department of Taxation. This would include processing returns and payments via the Ohio Business Gateway, with distributions back to the municipalities, along with handling audits and other administration. The proposal is intended only to affect the municipal taxes on business entities and not on personal income. Municipalities would continue to retain control of the administration of their individual income taxes and employer withholding and would likewise continue to control all tax rates and credits against their taxes, including the business entity taxes.

In addition, the "throwback" rule for sales of tangible personal property would be eliminated with, presumably, a default destination approach adopted.

Implications

The budget legislation is expected to be introduced in the Ohio General Assembly sometime by mid-February. The Governor normally signs the enacted legislation by June 30th. The legislation will be the subject of negotiations and, as is always the case, revisions over the next several months. It is anticipated that the provisions relating to municipal taxes will be vigorously opposed by the municipalities individually or via the Ohio Municipal League. EY will monitor this proposal as it moves through the legislative process and provide periodic updates of important developments.

———————————————

———————————————
ENDNOTES

¹ The revenue effects from the proposal are summarized in Table B-2 of the Governor's Budget Recommendations (available on the Internet here (last accessed Feb. 2, 2017).

² See Tax Alert 2013-349, and Tax Alert 2015-241.

³ See Tax Alert 2013-349.