On January 30, Ohio Governor John Kasich released his budget proposal for the next two fiscal years, which includes a number of changes to Ohio’s tax system. Ohio recently ranked 45th in the Tax Foundation’s State Business Tax Climate Index, largely due to municipal income taxes and the administrative burden placed on business. The governor has proposed a system where the state administers the net profits tax, including a single return and payment. The return and payment will be made through the Ohio Business Gateway. Employer withholding and individual returns will continue to be administered by the municipalities.
Other significant tax reforms in the budget include:
- Reducing the number of income tax brackets for individuals from nine to five; and a rate reduction of 17%. In 2018, the highest bracket for individuals with over $200,000 in income would be 4.33%, reduced from the current 4.997%. The proposal also includes an increase in the low income threshold and personal exemptions for individuals with $80,000 or less in income.
- In order to offset the reduction in personal income tax, the budget includes a 0.50% increase in the state sales tax rate to 6.25%. The sales tax base would also be expanded to include a number of services such as cable television, elective cosmetic surgery, lobbying, landscape design, interior design and decorating, travel packages and tours and repossession services. Unlike the governor’s last budget proposal, the current budget does not attempt to broaden the tax base by including the professional services of accountants or lawyers.
- The budget includes a “modernization” of Ohio’s oil and gas severance tax, with a significant increase in tax on crude oil and natural gas. The proposed severance tax rate on crude oil and natural gas is 6.5% at the wellhead and 4.5% downstream.
- Sin taxes will also increase under the governor’s budget proposal, with cigarette taxes rising $0.65 per pack and the alcoholic beverage tax adjusted for inflation and resulting in an increase $0.01 per serving. Ohio is following the lead of other states, including its neighbor, Pennsylvania, with an imposition of tax on vaping products.
Now that the governor has released his proposals, attention will turn to the Ohio legislature as it begins its work on the budget this week. The governor’s proposed increase in severance taxes on the oil and gas industry is unlikely to garner sufficient support from the Republican majority General Assembly to become law. Other lawmakers have expressed concern over the increase in the state sales tax rate as a tax shifting scheme they oppose. Under Ohio law, the budget must be signed by the governor before the 2018 fiscal year that begins July 1, 2017.