Ohio’s small-business owners received a tax cut in the final state budget bill that legislators approved and the governor signed into law at the end of June. “Most small businesses are getting a whopping tax cut,” said Gov. John Kasich in commenting about the budget legislation that the Ohio General Assembly approved on June 28 and the governor signed into law on June 30.

The final budget bill restored the 50 percent income-tax deduction for small-business owners originally proposed by the governor, but deleted in the House’s version of the two-year budget proposal. The Senate had restored the tax cut, and a conference committee, which reconciled differences between the House and Senate versions of the bill, retained the deduction amounting to an estimated $1.4 billion over a two-year budget period that begins July 1.

The legislation provides a deduction equal to 50 percent of a sole proprietor or pass-through entity owner’s business income.  The deduction is limited to $125,000 per taxpayer per year, or $62,500 for spouses who file separately and who each report business income.  This personal income tax deduction is available for 2013 and cannot be applied to returns for estates, trusts, or pass-through entities.  Business owners would save up to a maximum of approximately $7,000 a year in income-tax payments. Total savings for owners would be $1.1 billion over the two years.

The budget authorizes spending through June 30, 2015, with the bulk of the funds devoted to schools and health care programs, including Medicaid. The 5,000-plus page bill also includes a number of tax reforms that the administration and legislators believe will help position the state for further economic growth.

The bill did not include an expanded sales tax on services, as the governor had proposed, but it did make some changes in other tax provisions affecting businesses.

One of these changes involves the Commercial Activity Tax (CAT). The bill sets the following new minimum tax payments:

• Businesses with $1 million to $2 million in receipts would face an $800 minimum.
• Businesses between $2 million and $4 million in receipts would face a $2,100 minimum.
• Businesses with more than $4 million in receipts would face a $2,600 minimum.
• All business would be subject to a .26 percent rate on receipts over $1 million in addition to the tiered minimum while those with $150,000 to $1 million in gross receipts would continue to pay a flat $150.

Other provisions of the bill include: 

• An increase in the state’s sales tax. Changes to Ohio’s sales tax include an increase from 5.5 percent to 5.75 percent, effective September 1. The law also subjects the sale of electronically transferred digital books or digital audio or audiovisual works to sales tax

• A reduction in personal income tax for all taxpayers. Personal income tax rates are cut by 10 percent across-the-board, phased in over three years. The state currently has nine income-tax brackets, ranging from 0.6 percent for annual income under $5,200 to 5.9 percent for income earned beyond $208,500. The new law reduces all income-tax brackets by 8.5 percent this year, then 9 percent next year and 10 percent in 2015 and beyond. A 10 percent cut would bring the top rate to 5.3 percent. It also temporarily freezes tax brackets and personal exemptions so they no longer rise with inflation and puts in place a nonrefundable earned-income tax credit.

• Elimination of the 12.5 percent residential property tax rollback on any new and replacement tax levies. The state pays 12.5 percent of your local property-tax bill. This costs the state about $1.1 billion per year just for schools, which receive most of those taxes. The amount has grown as new levies have been approved. All current levies and those approved in August would not be affected, nor would renewals of current tax levies. But new levies, including replacement levies, would cost homeowners more than they would have under current law because they would pay 100 percent of the levy.

• A change in eligibility for the homestead exemption. Seniors age 65 or older and residents who are permanently disabled qualify for the homestead exemption, shielding $25,000 of the market value of their home from property taxation. Those who are not yet 65 and who earn more than $30,000 no longer would qualify for the homestead exemption. This was the threshold before eligibility was expanded in 2007.

In all, the budget includes a $2.7 billion tax cut over three years.

Among the items the governor vetoed from the bill was a proposal to collect internet sales tax on transactions between out-of-state retailers and Ohioans. The governor questioned the provision’s legality.

He also vetoed language that hindered his efforts to move forward with an expansion of Medicaid. However, discussions on how to expand and reform Medicaid are expected to take place through the summer and could be acted upon in September. The governor wants to cover another 275,000 low-income Ohioans and bring $13 billion in federal funding to the state over the next seven years.

• Category: Other News & Info, Whalen & Company