• Ohio: Gov. Kasich Approves Final Budget for Fiscal Year 2016-17
  • July 13, 2015 | Authors: David H. Godenswager; David M. Kall; Susan Millradt McGlone
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • Last week, Ohio’s General Assembly signed off on the final $130 billion, nearly 3,000 page budget bill (HB 64) for fiscal year 2016-17. This week, Gov. John Kasich largely did the same but chose to exercise his veto authority over 44 provisions.

    In February when the governor released his budget proposal, Blueprint for a New Ohio, he promised to reduce taxes and shift the tax burden from income based assessment to consumption, by instituting a sales tax hike, a cigarette tax, and taxes on oil and gas profit. These measures, he proposed, would fund the elimination of the state income tax on Ohio-based small businesses, the 23 percent cut in the income tax, and increased exemption levels for lower and middle income buckeyes.

    Lawmakers did not agree with many aspects of the governor’s proposal; the approved budget gives him quite a bit less than he originally proposed. Especially contentious were provisions relating to income, cigarette, and fracking taxes, and Medicaid and education spending. Here is a rundown of some the final budget’s key provisions, as reported in The Plain Dealer:

    • Personal income tax: The 23 percent reduction that Gov. Kasich hoped for was reduced to a 6.3 percent cut. In 2016, Ohio’s top marginal income tax rate will be 4.97 percent, the lowest rate since 1982.

    • Business income tax cut: Gov. Kasich wanted to eliminate all the income taxes on pass-through business entities with gross receipts under $2 million. The final budget enacts a 75 percent exemption this tax year, and a 100 percent exemption next year on the first $250,000 of net income. On income beyond the first $250,000, business owners will pay a flat tax of 3 percent.

    • Sales tax: Gov. Kasich wanted to increase the rate from 5.75 percent and broaden the base to cover more services, but the final budget leaves the sales tax unchanged.

    • Cigarette tax: The final bill contains a 35 cent per pack increase, though Gov. Kasich proposed a $1.00 per pack increase.

    • Severance tax: Lawmakers nixed Gov. Kasich’s proposed 6.5 percent tax on crude oil and natural gas and the 4.5 percent tax on natural gas and natural gas liquids that are processed; the result is no change to the oil and gas severance tax rates.

    • K-12 education spending: The governor wanted to give more money to poorer districts and less to affluent ones, increase the per-student aid amount from $5,800 in fiscal year 2015 to $6,000 in fiscal year 2018, and ultimately increase state aid overall by $700 million. The new budget increases state aid by about $950 million, raises the base per-pupil aid rate to $5,900 for fiscal year 2016 and $6,000 for fiscal year 2017, and guarantees that no district would lose money from its 2015 funding rate.

    • College tuition freeze: The final budget freezes college tuition for the next two years, versus Gov. Kasich’s proposal for a 2 percent increase in fiscal year 2016 and a freeze for 2017.

    • Medicaid: Ohio will continue to accept Medicaid funding.

    • Commercial Activity Tax: The final budget keeps the CAT at 0.26 percent.

    • Social Security benefits: The final budget keeps the tax on Social Security benefits as-is; the governor wanted to tax benefits for people with a total income over $100,000.

    The items that Gov. Kasich vetoed include the following, according to The Columbus Dispatch and The Plain Dealer:

    • A provision permitting the Ohio Lottery Commission to install 3,000 gambling terminals in bars and taverns across the state. Ohio’s casinos and racinos opposed the expansion of gambling.

    • A provision prohibiting the Controlling Board, a legislative-spending oversight panel, from authorizing the spending of unanticipated money that exceeds $10 million or 10 percent of the initial appropriation. The governor did not want this to be used to block Medicaid expansion.

    • A provision to allow physicians to prescribe non-controlled substances via telemedicine phone calls with first-time patients.

    • A provision limiting notifications about the release of various substances in the event of an emergency involving oil and gas drilling.

    • A provision exempting electrical generation plants from the public utility tangible personal property tax, shifting the tax to the transmission and distribution systems.

    Here is the Buckeye Institute for Public Policy Solutions' (Institute) view on certain measures:

    • Personal income tax: The 6.3 percent reduction is not enough because it allows workers to claim that they are independent contractors and thus avoid 75-100 percent of their tax liability, based on the exemptions for business income included in the budget.

    The Institute suggests that replacing the small business exemptions with larger across the board personal income tax cuts would be a sounder tax strategy.

    • CAT and cigarette taxes: The Institute believes that shifting taxes under schemes like this is bad tax policy; the CAT tax makes Ohio less attractive for businesses, and the cigarette tax just increases black market smuggling.

    • Severance tax on fracking: The Institute asserts that the higher the severance tax, the greater the threat to job growth. In addition, a tax on any particular industry “violates the principle of tax equity by singling out one enterprise for extra taxation.” The Institute approves of the fact that there is no change to the tax on oil and gas in this budget.

    • Primary education spending: The Institute characterizes this provision as “[f]ar from perfect and still spending more than needed.” It prefers that the budget would ease back on education spending growth to protect future taxpayers.

    The governor’s press release containing an overview of the budget declares that it is “among the strongest, thanks to conservative budgeting and smart management. The result is an economic climate friendly to job creators and a formula for future prosperity that helps more Ohioans participate in our state’s economic revival.”