- Ohio: Governor Kasich Signs Massive Budget into Law, Implications for Ohio State Taxes
- July 4, 2013
- Law Firm: McDonald Hopkins LLC - Cleveland Office
Just after 8:00 p.m. on Sunday, June 30, Ohio Governor John Kasich signed Ohio’s new $62 billion budget bill. The 5,557-page law sat over three feet tall. The budget includes a $2.7 billion tax cut over the next three years. The law went into effect July 1, however, effective dates vary for different provisions. Governor Kasich stated he believed the budget bill illustrates his administration’s continued efforts to improve Ohio’s economy through income tax cuts, business incentives and new ways of funding education.
Republicans have praised the governor’s budget as one that cuts taxes for individuals and small businesses, stating 98 percent of Ohioans should see tax decreases. Democrats have critiqued the budget arguing it will disproportionately benefit the wealthy while sales tax changes will hurt lower-income Ohioans. Democrats have also argued the property tax shift will make it harder for local communities to fund essential services like education.
Some of the most notable changes to Ohio state taxes are outlined below:
Sales and use tax:
- Effective September 1, 2013 the state sales tax rate will increase from 5.5 percent to 5.75 percent.
- Effective January 1, 2014 specified digital products provided for permanent or less than permanent use are taxable.
Personal income tax:
- The budget creates a new income tax deduction for individuals receiving small business income as a sole proprietor or as an owner of a pass-through entity. This deduction allows individuals to deduct 50 percent of business income included in the taxpayer’s federal adjusted gross income not otherwise deducted in calculating Ohio taxable income, to the extent such income is apportioned to Ohio. There is a $125,000 cap on this deduction per taxpayer per year ($62,500 for spouses who file separately and each report business income). This deduction can first be taken in taxable years beginning in 2013.
- The law gives a 50 percent tax cut for certain small businesses structured as pass-through entities, such as S-corporations and partnerships, on the first $250,000 in net small business income.
- Sometime later this year, withholding tables will be updated to reflect an 8.5 percent cut in the income tax rates for the current year. The income tax rates will be cut nine percent next year and 10 percent in 2015.
Commercial activity tax:
- The minimum tax due for the commercial activity tax was changed as follows:
- For taxpayers with annual taxable gross receipts of $1 million or less for the calendar year, the minimum remains $150
- For taxpayers with annual taxable gross receipts greater than $1 million but less than or equal to $2 million for the calendar year, the new minimum is $800
- For taxpayers with annual taxable gross receipts greater than $2 million but less than or equal to $4 million for the calendar year, the new minimum is $1,100, and
- For taxpayers with annual taxable gross receipts greater than $4 million for the calendar year, the new minimum is $2,600
- The law removed a 12.5 percent state tax credit of local property taxes.
- Homestead property tax exemption will be limited to homeowners who are at least 65 and earn less than $30,000 a year.
Potential effect of Federal Marketplace Fairness Act:
Governor Kasich vetoed an item which would have imposed a state sales tax between out-of-state Internet retailers and Ohio residents. However, it is important to note Governor Kasich did not veto the provision, which would approve the Marketplace Fairness Act if and when it is passed by Congress. The proposed Federal Marketplace Fairness Act allows states to require out-of-state businesses to collect and remit sales taxes on such business’ qualifying remote sales. Governor Kasich rationalized his decision on the basis that similar sales tax provisions in other states have resulted in extensive litigation and Ohio should wait for Congress to take action on the issue before making such a policy change.