Ohio Budget Proposal

Income Tax Cuts, Lower Sales Tax Rate but Higher Base and Much More

Gov. John Kasich announced Monday that his “Jobs 2.0” budget plan will grow small business and cut the tax burden for Ohio families over the next three years through significant tax cuts to individuals and small business owners.

The governor proposes to cut all personal income tax rates a total of 20 percent over three years. For calendar year 2013, all rates would be reduced 7.5 percent; for calendar year 2014, all rates would be reduced an additional 7.5 percent; and in calendar year 2015, a third reduction of 5 percent would be made. The top marginal rate would be reduced from 5.925 percent to 4.74 percent.

In addition, the owners of a small business organized as a pass-through entity (i.e., S Corporation, Partnership or LLC) would receive a deduction of 50 percent of the net income received from the entity. The deduction is limited to the first $750,000 of net income received from the entity, thus being capped at $375,000. Stay tuned for more details on these provisions, as it is unclear whether the $750,000 limit applies to each individual owner or at the entity level.

The budget proposes to fundamentally change the manner in which services are subject to the Ohio sales tax. Currently, it is presumed that services are not taxable unless specifically enumerated as taxable. Under the proposal, this structure will be reversed. All services would be subjected to the tax unless specifically exempted.

Services considered “necessities of life” will be exempt from the tax. Such services include health care, construction, residential rentals, education, social assistance, day care, insurance premiums, and trash removal. Professional services such as legal, accounting, engineering, architecture, marketing, lobbying and research, administrative and support services such as collection or credit ratings, financial and real estate services, and arts, recreation, entertainment, and other admissions-type transactions will all become taxable.

The state tax rate would be reduced from 5.5 percent to 5.0 percent. Local tax rates would be reduced by means of a formula that would limit any windfall provided by the expansion of the tax base. The local rates would be adjusted to permit roughly a 10 percent increase in revenue to any entity imposing a local tax. Between October 2013 and June 2016, no new additional local taxes may be imposed as the rate adjustment is calculated and refined.

Resurrecting the proposal that was made during 2012, but which was not enacted, the budget proposes to increase the severance tax associated with the use of horizontal wells to produce oil and gas from shale formations in the state.

While the governor casts this budget as a tax decrease, the projected net effect is an increase in state tax revenues.  This is a clear policy shift to derive more revenue from consumption and less from income and investment.  Many questions remain, and changes may be proposed and negotiated.  Stay tuned as more specifics become available.

If you have any questions, please contact your Meaden & Moore representative or Leslie Kasten at lkasten@meadenmoore.com or David Di Salvo at ddisalvo@meadenmoore.com.