Budget Update: Senate Finance Committee

On Tuesday, April 25, 2017, hours after members of the House Finance Committee accepted a substitute version of the budget bill (HB 49), their colleagues on the Senate Finance Committee began hearing the tax reforms put forth in Governor Kasich’s original budget proposal. Ohio Tax Commissioner Joe Testa testified in support of the administration’s tax proposals, many of which have now been eliminated or diminished in the House version of the budget.

Headlining the governor’s tax proposals is the reduction of personal income tax rates and consolidation in the number of income tax brackets from nine to five. Together these proposals result in an estimated 17 percent reduction of personal income tax liability, phased in over two years. Additionally, the governor’s budget would increase the personal exemption for those earning less than $80,000 per year and raise the income threshold for the low-income tax credit from $10,000 to $15,000, effectively eliminating state income taxes for more than 350,000 low- and middle-income Ohioans.

The reduction in state income tax collections would be mostly offset by a proposed increase in the state sales tax rate from 5.75 percent to 6.25 percent. Commissioner Testa testified that the shift from reliance on income taxes to sales taxes is necessary to correct a “competitive disadvantage” in which high income tax rates impose a barrier against attracting employers and creating jobs in the state. However, senators from both parties pointed out that many senior citizens and other low-income individuals would not see the benefits from the income tax reduction, but would be negatively impacted by higher sales taxes.

Another notable proposal in the governor’s budget calls for raising the tax on cigarettes from $1.60 to $2.25 per pack. Correspondingly, an increase in the tax rate on other tobacco products (e.g. cigars, chewing tobacco, etc.) from 17 percent to 69 percent paired with a new 69 percent tax on vaping products containing nicotine is proposed to avoid incentivizing some tobacco products over others. Commissioner Testa testified that higher tax rates on tobacco are a proven deterrent to youth smoking, while also maintaining that Ohio Department of Taxation (ODT) data show previous tax increases have not led to a decline in taxable retail sales in border counties nor statewide. The committee had no questions regarding the tobacco tax proposals.

The proposal that generated by far the most conversation among the committee was the centralization of the municipal income tax filing for business net profits. Under this plan, ODT would serve as the sole administrator of municipal net profits taxes on businesses.  The proposal is designed to offer more uniformity and lower compliance costs to Ohio businesses that currently may be required to file returns to dozens or even hundreds of the over 600 municipalities that levy the net profits tax. The centralized system would instead require businesses to file one return electronically through ODT’s Ohio Business Gateway (OBG) under a single set of rules, and ODT would then distribute these revenues quarterly to the municipalities to which the taxes are owed. But despite ODT’s estimate that the new system would save businesses up to $800 million in reduced compliance costs, several committee members questioned the need for centralization, saying they have not heard any complaints from businesses in their districts regarding municipal tax filing. Senator Charleta Tavares asked why such uniformity in filing could not be accomplished by a third party software program, rather than the state stepping in. Senator Peggy Lehner wondered whether state administration of the tax would soon lead to the net profit tax being considered state revenue rather than local revenue.

As a procedural note, despite holding informal hearings on the governor’s budget proposal, the Senate Finance Committee will work from the version of HB 49 as passed by the House of Representatives as its base when it begins its budget deliberations next month. The current text of HB 49 eliminates the governor’s proposed changes to the income, sales, and tobacco taxes as discussed above, as well as proposed changes to the commercial activity, severance, and alcohol taxes. The House’s budget bill also strikes the centralized municipal net profits tax collection, though it does allow businesses to optionally file a single return through OBG on which a business can report and pay the total tax due to all municipalities in which it earned net profits.

The tax reforms proposed in the governor’s budget, along with the tax policies laid out in the House and Senate versions, will continue to face heightened scrutiny due to a $615 million revenue shortfall that will require lawmakers to cut spending or increase revenues by $800 million over the next biennium. Commissioner Testa declined to offer new insight into the driving forces behind the lagging revenues, but echoed previous speculation that a rise in retirements of higher-income workers were likely a significant factor. When asked how the administration’s tax proposals would differ had they known earlier about the impending revenue shortfall, the commissioner explained that the budget is a package deal with many moving parts, making it impossible to say precisely how the earlier knowledge of the revenue problem would have impacted tax proposals.

The Center for Community Solutions has published detailed analyses of the governor’s budget proposals impacting the state’s health and human service agencies, which can be read in recent issues of State Budgeting Matters. An analysis of the changes made to the governor’s budget in the version passed by the House of Representatives will be presented in a State Budgeting Matters next month.