Multistate Tax Update -- July 2, 2015
Ohio: Gov. Kasich approves final budget for fiscal year 2016-17
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.”
Kansas: Gov. Brownback signs legislation to address the $400 million revenue deficit by increasing taxes
As has been widely discussed, by nearly any measure, Kansas’ experiment that decreased taxes without any plan to replace the lost revenue is a bona fide disaster.
According to a 2014 publication from the Center on Budget and Policy Priorities, "Lessons for Other States from Kansas' Massive Tax Cuts," Gov. Sam Brownback’s plans to phase out the income tax were enacted beginning in 2012. The legislation decreased the top two income tax rates from 6.45 percent and 6.25 percent on income over $60,000 and on income between $30,000 and $60,000, respectively, to 4.9 percent on income over $30,000. It also cut the bottom rate, on income under $30,000, from 3.5 percent to 3 percent.
In addition, lawmakers exempted taxes on all business profits that are "passed through" from the firm to individual owners, raised the standard deduction, and eliminated certain tax credits, like rebates for sales taxes paid on food, that help low income families.
In the next year (2013) legislation further cut income tax rates, which were to bottom out in 2018 with a top rate of 3.9 percent. Lawmakers did raise some revenue to offset some of the 2012 losses, in part by repealing a portion of the standard deduction increase from 2012. They also partially restored the food sales tax credit, and set the sales tax rate at 6.15 percent, instead of letting it fall to 5.7 percent as had been previously scheduled.
Vox.com reported that as a result of all of this, Moody’s downgraded the Sunflower State’s bond rating, job growth faltered, education funding suffered, and services declined. In January 2015, after Gov. Brownback narrowly won re-election, Kansas faced a shortfall of $600 million, on a $15 billion budget, for fiscal year 2016.
For tax years 2015, 2016, and 2017, the rates for individuals are set at 2.7 percent on taxable income up to $15,000 ($30,000 for married individuals filing jointly), 4.6 percent on taxable income over $15,000.
ThinkProgress.org noted that the legislation also partially reverses the elimination of all taxes for pass-through entities, which cost the state close to $207 million in 2013. The group characterized the pass-through exemption as Gov. Brownback’s “most aggressive and disastrous tax cut,” in part because so many businesses, which were not eligible because of their corporate form, re-configured to be able to take advantage of it.
Lawmakers also established a tax amnesty period, from Sept. 1, 2015, to Oct. 15, 2015. The amnesty applies to privilege, income, estate, cigarette, tobacco products, liquor enforcement, liquor drink, severance, state sales, state use, local sales, and local use taxes. The amnesty is limited to penalties and interest applied to liabilities associated with tax periods ending on or before Dec. 31, 2013.
Other provisions, summarized by the Tax Justice Blog under the headline "And That's a Wrap...the Failed Experiment in Kansas Continues," provide for the following:
Itemized deduction reform: The bill limits itemized deductions for mortgage interest and property taxes paid. This change is expected to generate $97 million in fiscal year 2016.
- Sales tax rate hike: The sales tax rate (including groceries) increases from 6.15 percent to 6.55 percent. This rate increase is expected to bring in $164 million in fiscal year 2016.
- Cigarette tax rate hike: The cigarette tax increases by 50 cents per pack to $1.29 beginning July 1. The tax hike is expected to generate $40 million in fiscal year 2016 and will almost certainly generate less in years to come.
- Low income exemption: Taxpayers with taxable income less than $5,000 ($12,500 for married couples) are exempt from paying the personal income tax.
- Guaranteed payments: These payments, received from some types of pass-through business income, will now be taxed. This change is expected to bring in $23.7 million in fiscal year 2016.
Numerous outlets have reported that some lawmakers were very opposed to increasing taxes and view these increases as especially hard on Kansas’ poorest citizens, while still helping the richest. The Wichita Eagle revealed that those making more than $493,000 (who represent the top 1 percent of Kansans) will pay $24,632 less in taxes even after accounting for these increases.
Kansas is eighth on the Institute of Tax and Economic Policy’s list of the Top 10 Most Regressive State & Local Tax Systems. This is because those taxpayers in the bottom 20 percent of the income scale pay tax rates that are up to seven times more than the rates on the wealthy. Even middle-income families residing in these highly regressive states pay a rate up to three times higher as a share of their income as the wealthiest families.
Examples of regressive taxes are those on cigarettes and sales taxes. ThinkProgress.org pointed out that “more than half of the $384 million in new revenue expected from the tax hike will come from cigarette taxes and sales taxes…” which fall more heavily on lower-income taxpayers than on the wealthy.
The Wichita Eagle noted Gov. Brownback’s insistence that the $384 million plan is not a tax increase, “because it comes after tax cuts.”
New Jersey: Lawmakers introduce legislation to exempt Holocaust reparations payments from taxation
Last year, lawmakers introduced AB 1041, a bill that would exempt from all claims of creditors and from levy, execution, attachment, or other legal process, monetary reparations designated for or received by a Holocaust survivor from any governmental or victim assistance source. This applies to all legal processes except child support orders. The legislation also exempts these funds from estate recoveries under the Medicaid program.
Earlier this year, the proposed law progressed from the Assembly Judiciary Committee to the Senate Committee. On June 8, 2015, the Senate Budget and Appropriations Committee released the bill as SB 2676, where it awaits further action.
In March, one of the sponsors, Assembly Democrat Valerie Vainieri Huttle, issued a press release in which she declared that “[a]s the dust has settled on this sorrowful chapter in history, certain things must be treated as sacred, and this is one of them…this is the right thing to do for the many families who only have monetary reparations to serve as justice in the end.”
The March press release, noting that approximately 4,500 Holocaust survivors live in New Jersey, provided additional background. In 2000, an $800 million settlement fund was established pursuant to the ratification of a global settlement agreement and plan of distribution. The fund was designed to provide restitution to Holocaust victims and their survivors for money illegally obtained from Swiss banks by the Nazis. Since then, the Claims Resolution Tribunal has received over 32,000 claims from Nazi victims, or their heirs, to assets deposited in Swiss banks in the period before and after World War II.
Two years before that, the International Commission on Holocaust Era Insurance Claims (ICHEIC) established a program to settle insurance claims never paid to Holocaust victims or their heirs. This group was established in August 1998 to identify, settle, and pay individual Holocaust era insurance claims at no cost to claimants. It ceased accepting new claim forms on March 31, 2004, and as of December 2006, all timely filed claims received a final decision through the ICHEIC process.
Following all of these efforts, assemblywoman Huttle was part of another group that introduced a related bill in May of this year (A-4421) which has been referred to the Assembly Budget Committee. A-4421 would eliminate inheritance and estate taxes on reparations received by Holocaust victims, survivors, and their descendants. A late May press release reveals this bill’s overarching purpose: “to alleviate the tax burden on the restitution payments and distributions received by Holocaust survivors…This is a small token of remembrance and compensation for the untold losses that can never fully be recuperated."
A-4421 defines the payments and individuals that are eligible for exemption broadly. The language specifies the following:
“Eligible restitution payment or distribution” is any payment or distribution that:
1. Is paid to the decedent during the life of the decedent by reason of the decedent's status as an individual who was persecuted by the Nazi regime or by reason of the decedent's status as an eligible descendant of an individual persecuted by the Nazi regime, including any amount paid by a foreign country, the United States of America, or any other foreign or domestic entity, or a fund established by any country or entity, any amount paid as a result of a final resolution of a legal action, and any amount paid under a law providing for payments or restitution of property;
2. Constitutes the direct or indirect return of, or compensation or reparation paid to the decedent for, assets stolen, hidden, or otherwise lost to an individual who was persecuted by the Nazi regime before, during, or immediately after World War II or an eligible descendant of a persecuted individual, including any proceeds of insurance under policies issued on persecuted individuals by European insurance companies immediately before and during World War II; or
3. Consists of interest that is paid as part of any payment or distribution described above.
An “[e]ligible individual” is an individual who was persecuted for racial or religious reasons by Nazi Germany, any other Axis regime, or any other Nazi-controlled or Nazi-allied country.
New Jersey has had a law on its books since 1998 that excludes Holocaust restitution and compensation from income for gross income tax and PAAD (Pharmaceutical Assistance to the Aged & Disabled) eligibility purposes.
According to the Conference on Jewish Material Claims Against Germany, Inc., most states exempt compensation and restitution payments from taxation. The only four states which tax these payments are Alabama, Arkansas, Mississippi, and Pennsylvania.
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