Ohio Governor John Kasich introduced the original Jobs 2.0 Tax Reform Proposal as one part of an overall effort to attract jobs to the state. His reported goal was to reduce income tax in order to improve Ohio’s competitive position in garnering employers.
While it looks like Kasich will not get everything he proposed, many tax provisions in House Bill 59 survived the House and Senate deliberation process last week, and were passed by the Conference Committee on Tuesday.
The proposed budget is unlikely to see further significant changes prior to becoming final. The General Assembly will vote later this week; Kasich can make line-item vetoes and sign the budget into law by June 30.
Below we highlight key tax components of the proposed changes, which are expected to result in almost $2.7 billion in tax decreases over the next three years.
Income Tax Reductions
- Tax reduction for small business owners (i.e. LLC’s, S corporations, and partnerships) – Kasich originally proposed a 50% deduction for businesses operated as pass-through entities on the first $750,000 of pass-through income. The conference committee settled on reducing the $750,000 to $250,000, meaning the maximum tax benefit is about $6,700 (taking into consideration the 2013 rate reduction discussed below).
- Rate reduction – Kasich’s proposal originally outlined a 20% across-the-board reduction in income tax rates, with a 4.74% rate proposed for tax year 2015. In its current state, the proposal now provides for an 8.5% reduction for 2013, a 9% reduction for 2014, and a 10% reduction for 2015. The plan also eliminates the $20 personal exemption currently in effect, but adds a non-refundable earned income tax credit equal to 5% of the federal earned income tax credit. Once income exceeds $20,000, the credit may not exceed 50% of the tax due.
Commercial Activity Tax (CAT) Changes
- Introduction of variable minimum tax amounts – Under the proposed law, the $1 million annual CAT exemption is maintained but a new variable minimum tax amount structure is imposed. The minimum tax is in addition to the current tax rate of .26% on annual gross receipts in excess of $1 million. The new tiered tax applies to annual gross receipts as follows:
- $150,000 – $1 million = $150
- $1 – $2 million = $800 + .26% on receipts over $1 million
- $2 – $4 million = $2,100 + .26% on receipts over $1 million
- More than $4 million = $2,600 + .26% on receipts over $1 million
Sales and Use Tax Increases and Expansion
- Sales and Use Tax rate increase – Recall under Kasich’s original proposal that the current sales/use tax rate of 5.5% (excluding the county component) was slated to be reduced to 5%. The current proposal increases the state sales tax rate to 5.75%.
- Sales Tax Base Expansion – Kasich’s original proposal called for a dramatic expansion of the sales tax base, taxing such items as professional services. The proposed plan curtails such expansion, but taxes digitally downloaded products, other specified digital products, and magazine subscriptions. Additionally, under the proposed plan, Ohio would become a full member in the Streamlined Sales Tax Initiative allowing for increased collection of use tax from remote sellers, pending outcome of federal legislation known as the Marketplace Fairness Act.
Real Property Tax increases
- Elimination of 10% rollback – You may recall that in 1971 the state began paying a portion of homeowners’ property taxes by way of the 10% rollback. The proposal eliminates this rollback in an effort to move to a more simplified system in which property owners pay their entire property tax bill, but enjoy reduced income tax rates.
- Elimination of 2.5% exemption for owner occupied residential property – Currently there is a 2.5% homestead exemption for residential property owners that are disabled, or at least 65 years old. The proposal recommends placing an income limitation on that exemption. Owners turning 65 with annual income in excess of $30,000 will not be eligible for the exemption under the proposed plan. However, owners that currently qualify for the exemption will not be affected.
Both Kasich’s original plan and the proposal that came out of the Ohio House and Senate Conference Committee aim to make Ohio more attractive to individuals and businesses. The theme is to move Ohio to more of a consumption-based taxing State, while simultaneously reducing income tax burden.
Clark Schaefer Hackett will provide a more detailed summary of this bill after the budget is finalized in early July. If you you’d like to discuss the Ohio budget bill or the proposed tax changes, please contact us. The effects of this new legislation are far-reaching and we want to make sure you are prepared.
Bill Hallmark is a Principal with Clark Schaefer Hackett and is an experienced tax advisor to privately held businesses and their owners. He specializes in State and Local Tax (SALT) matters. He can be reached at [email protected]. Brittany Lawrence is a Manager who focuses on business tax planning and compliance. She can be reached at [email protected].