Governor Kasich recently announced his proposed executive budget for the FY 2014 and 2015 biennium. This budget, labeled “Ohio’s Job Budget 2.0”, proposes significant tax reform and also looks to alter the composition of Ohio spending.
Summary of Ohio Tax Changes:
The governor’s intent of the tax reform proposal is to provide a tax system that will make Ohio more competitive in attracting investment and jobs, while also applying the tax burden more fairly across all industries. The tax reform proposal’s biggest change is a broad expansion of the sales tax base to include most services combined with a 9% reduction in the state sales tax rate. This expansion of the sales tax is used to reduce income tax rates by 20% over three years and provide for a small business income tax exclusion of up to $375,000 for pass-through entities and sole proprietors. The proposal also revises the severance tax structure. All in all, it is estimated to provide a net tax cut to Ohioans of $1.4 billion over three fiscal years.
Sales Tax Changes
The tax proposals related to sales tax are based on the principal that taxes with broader bases and lower rates are preferred. The proposal would expand sales and use tax to include all services except those that are explicitly excluded. Previously, only those that were specifically stated in the Ohio Revised Code as taxable services were taxed. Those services that are considered “essentials for modern life”, such as health care; construction services; rental of residential property; and education services, would be tax exempt. The proposed new taxable services include but are not limited to the following:
- Transportation Services (Intrastate)
- Information Services- Motion Picture Production, Cable Broadcasting, and Internet Publishing
- Financial Services Fee Income (no Interest Income), Insurance-Related Services (Excluding Premiums) and Real Estate Services (Lessors of Nonresidential Buildings: Agents, Brokers and Appraisers)
- Legal and Accounting Services
- Architectural, Engineering, and Design Services (Including Computer Systems Design); and Other Professional Services (Management Consulting, Scientific Research, Advertising, Marketing, and Lobbying)
- Administrative and Support Services (Collection Agencies, Credit Rating Services, Travel Agencies), Waste Management and Remediation Services
- Arts, Entertainment, and Recreation
- Miscellaneous Other Services (Parking Lots and Garages, Coin Operated Laundries) and Non-Profit Adjustment
In conjunction with expanding the sales tax base, the state sales tax rate would be reduced from 5.5% to 5.0% and the local sales tax would be reformed in order to prevent a windfall due to the expanded tax base.
Since the sales tax base is expanding, the local sales taxes will piggyback and apply to the newly taxable services. To prevent a large increase in the local tax, the proposal includes a limitation of local sales tax revenue growth of 10% from the current amounts. Therefore the proposal includes a reduction of local tax rates by differing amounts based on the expected level of local sales tax increases by county or transit authority.
Individual Income Tax
Kasich’s plan proposes a reduction in income tax rates of 20% over 3 years being applied to all 9 brackets as follows:
|Highest Marginal Tax Rate
|Mid Marginal Tax Rate
|Reduction of Withholding Rates
Additionally, Governor Kasich announced that the expected budget surplus for FY 2013 will be enough to allow a deposit into the Income Tax Reduction Fund. This deposit would allow for an additional 4% income tax cut for tax year 2013 which is not included in the table above.
Small Business Tax Cut
A proposed change for small businesses provides a reduction in income taxes for owners of small businesses organized as pass-through entities (PTEs) such as S Corporations, partnerships, LLCs and sole proprietorships. The proposal provides the owner(s) of the PTE a deduction of 50% of their annual PTE income up to $750,000, resulting in a deduction capped at $375,000. This deduction is shared between all owners proportionately based on their percentage of ownership of the PTE.
Governor Kasich’s plan also calls for changes in severance tax due to the rapid growth in the Utica Shale industry. A severance tax is put in place for high-volume horizontal wells operating in the Utica Shale formation. The tax structure for conventional wells generally is the same although there is a new exemption for small conventional wells (those wells with daily production less than 10 million cubic feet (MCF)). Severance tax on non-exempt conventional wells is changed from 3 cents per MCF to the lesser of 3 cents per MCF or 1% of value. This change provides a tax savings when gas prices are below $3 per MCF.
The proposed tax rate for horizontal wells is 1% for natural gas and 4% for oil, natural gas liquids, and condensate. The proposal also calls for a lower 1.5% tax rate (from the 4%) for the first year to offset initial costs of preparing a site.
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.