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Mid-Biennium bill proposes increases to business and tobacco taxes to fund income tax reduction

The governor’s highly anticipated Mid-Biennium Review (MBR) bill was introduced this week to the ire of many Ohio retailers. House Bill 472 would provide an 8.5 percent income tax reduction over three years paid in large part by Ohio’s smokers, businesses and oil and gas producers.

Tobacco taxes

The MBR increases the rate of the cigarette excise tax from the current $1.25 per pack to $1.55 per pack beginning July 1, 2014, and to $1.85 per pack beginning July 1, 2015. This change would generate an additional $151 million in Fiscal Year (FY) 2015 and up to $288 million in FY 2016.

The bill would also increase the rate of tax levied on Other Tobacco Products (OTP), which include cigars, little cigars, chewing tobacco, snuff, smoking tobacco, and other tobacco products that are not cigarettes. Under the measure, electronic cigarettes would also be subject to the OTP. The rate would increase to 41 percent of the wholesale price beginning July 1, 2014, and to 49 percent beginning July 1, 2015. Under current law, the tax rate is 37 percent of the wholesale price for little cigars and 17 percent of the wholesale price for all other tobacco products. The administration anticipates an additional $63 million in FY 2015 and up to $83 million in FY 2016.

The MBR would allocate $26.9 million to the Ohio Department of Health to support a five-year plan for tobacco prevention, cessation and enforcement programs.

Severance tax

The governor’s severance tax proposal would increase the rate to 2.75 percent on gross receipts for horizontal wells. Currently, the severance tax for oil is 20 cents per barrel and $.03 per Mcf of natural gas and natural gas liquids. The proposal does not increase the percentage for vertical wells. If production for a vertical well is less than 10 Mcf per day, it would be exempt from the severance tax.

The bill would allocate 20 percent of the increased revenue to local communities impacted by oil and gas drilling. The administration projects this would provide more than $165 million of assistance over three years to these areas. Similar to the proposal in Substitute HB 375, half of the local funds would be distributed by order of various County Budget Commissions. Twenty-five percent of the funds would go towards infrastructure improvements as directed by a newly-created regional commission. The remaining 25 percent would go into a legacy fund for distribution after 2025 at the direction of the regional commission.

Revenue from the increase would first be allocated to the Ohio Department of Natural Resources (ODNR) for oil and gas regulation, geological mapping, regulatory cost recovery, and orphan well mitigation. The remaining 80 percent of revenue would be used for an income tax reduction. Coupled with his proposals to increase the cigarette and other tobacco product taxes as well as the commercial activities tax, the proposal would provide an 8.5 percent reduction to the state personal income tax over a three year period.

The proposal varies from a previous House proposal, which would increase the rate to 2.25 percent. Substitute HB 375 was introduced in January and has underwent substantial testimony in the House Ways and Means Committee. It is unclear which bill will serve as a vehicle for the measure.

Commercial Activities Tax

The governor’s proposal would increase the Commercial Activity Tax (CAT) from the current rate of 0.26 to 0.30. This would be the first rate increase since the CAT was enacted in 2005. Businesses with gross receipts exceeding $1 million a year pay this tax which is an annual privilege tax.

The change would have no impact on businesses exporting goods and services as the CAT is only applicable to sales made within Ohio. The administration projects the CAT increase would total about $278 million during the third year of the increase.

Income tax reduction

Overall the tax proposal would take the top income tax rate down to 4.88 percent and provide an income tax cut of 8.5 percent to taxpayers over a three-year period, a savings of $2.6 billion.

In addition to the tax cut, the proposal includes an expansion of the newly adopted Ohio Earned Income Tax Credit (EITC) from the current five percent, to a credit equaling 15 percent of the federal EITC claimed by the taxpayer. The MBR would also increase the value of the personal and dependent exemption which would lower taxes for taxpayers earning up to $80,000 per year. The exemption is currently $1,700 per person, regardless of a taxpayer's income. The proposal would create two new and larger exemption levels for low and middle income taxpayers: $2,700 per individual for taxpayers making up to $40,000 a year, and $2,200 for taxpayers making between $40,000 and $80,000 per year. Combined, the administration estimates these provisions will result in $450 million of tax relief for low and middle income taxpayers.

“When the impacts of all of the tax changes are considered together, there is a modest net tax reduction,” stated Ohio’s Office of Budget and Management Director Tim Keen during his testimony in the House Ways and Means Committee this week.

Speaker Batchelder has announced plans to break the 1600 page bill up into at least 11 separate bills. He has told media sources that he believes a majority of the bills could pass prior to the legislature’s spring break, which is scheduled to begin April 10 and last until after the primary. The measure is not currently scheduled for any hearings next week.

For more information, please contact:

Michael Caputo
(non-attorney professional)
216.348.5770
mcaputo@mcdonaldhopkins.com

Rebecca M. Kuhns
(non-attorney professional)
614.458.0043
rkuhns@mcdonaldhopkins.com

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