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Ohio: The tax impact of House Bill 483

In 2011, in an effort to make Ohio’s government smaller, more efficient, and more effective, Gov. Kasich worked with the General Assembly to enact his fiscal year 2012-13 budget. This budget cut taxes, streamlined regulations, and reformed government.

In mid-2014, the administration conducted a Mid-Biennium Review (MBR), which resulted in a package of bills that sought to initiate reforms to state spending, agency operations, and state policies and programs.

The main component of the MBR was House Bill 483 (HB483). According to a press release issued by State Representative Robert Sprague (R-Findley), who joined the governor for the bill signing, HB483 enacted several tax cuts and new tax relief for low- and middle-income Ohioans. This included $400 million in tax relief for tax year 2014, incorporating the following:

  • $175 million for individuals by accelerating the income tax reduction.
  • $225 million in tax relief for small businesses through a one-time increase of the small business tax credit.

More specifically, the state of Ohio reports that Ohioans’ taxes have been cut by more than $3 billion since Gov. Kasich took office in 2011, through the use of these initiatives:

  • Cutting small business taxes in half: Building on the 50 percent small business tax deduction enacted in 2013 (50 percent on the first $250,000 in small business income), the personal income tax deduction on small business income will increase temporarily to 75 percent for the tax year 2014.
  • Eliminating the death tax, also known as the estate tax, as of Jan. 1, 2013: When Gov. Kasich enacted his budget that killed the death tax, Politifact.com reported that its elimination affected the seven percent of estates in Ohio that are valued over $338,333, and that it funneled about $250 million a year to local governments and $60 million to state coffers.
  • Accelerating the 10 percent personal income taxes reduction: Initially scheduled to take effect in 2015, the one percent cut in the Ohio income tax rate was made retroactive to January 2014. Combined with the reduction of income tax withholding rates that began in July 2014, these two changes give taxpayers a 10 percent income tax cut in 2014 that was not originally scheduled to go into effect until January 2015.
  • Doubling the Earned Income Tax Credit (EITC): Ohio doubled the EITC for low income Ohioans by increasing its benefit from five percent to 10 percent of the federal credit.
  • Cutting low and middle income taxes: For families earning less than $40,000 per year, the budget increases the state income tax personal exemption from $1,700 to $2,200. For families earning between $40,000 and $80,000, the exemption increases from $1,700 to $1,950.

In a fact sheet touting the MBR results as of Aug. 21, 2014, various agencies attributed numerous benefits to Gov. Kasich’s budget, in these key areas:

  • New business creation: In 2013, 89,735 businesses were created in Ohio, the most in state history. Through Aug. 21, 2014, Ohio is ahead of 2013's record-breaking pace, having created 56,176 new businesses.
  • Job creation: Ohioans have created 245,000 new private sector jobs since Gov. Kasich came into office in January 2011.
  • Job retention: Initial claims for unemployment in 2013 were the lowest since 2000. In addition, year-to-date numbers in 2014 reflect the fewest first-time jobless claims on record going back to 1987 through the same time period.
  • Unemployment reduction: Since January 2011, Ohio’s unemployment rate has dropped from 9.1 percent to 5.5 percent, and the number of unemployed Ohioans has decreased from 527,000 in January 2011 to 323,000, a 39 percent decline.

In what is to be a series of articles titled "Axing Ohio's income tax: What would it take?", The Plain Dealer has begun to report on the affects of Gov. Kasich’s ultimate goal, which is to eliminate the state’s income tax altogether. This would reduce state revenues by about $8 billion a year. The paper’s series will explore what the state would need to do to achieve the governor’s goal.

Oklahoma: District Court invalidates Obamacare subsidies

One of President Obama’s key initiatives, the Patient Protection and Affordable Care Act (ACA), has taken a beating since the president signed it into law on March 23, 2010.

The ACA survived its most important test to-date in the United States Supreme Court case National Federation of Independent Business v. Sebelius. The key holding was that the individual mandate provision, which requires most Americans to obtain health insurance or pay a penalty, was a valid exercise of Congress’ power under the U.S. Constitution’s taxing clause, from which Congress derives all of its power to “lay and collect” taxes.

A more recent—and more successful—ACA challenge in a federal trial court in Oklahoma, Oklahoma v. Burwell, addressed the question of whether lower income workers who purchased their healthcare coverage on federally run exchanges could take advantage of the tax subsidies permitted by the law.

Background

As the court explained, the ACA established the exchanges as a “means to organize the insurance marketplace to help individuals shop for coverage and compare available plans based on price, benefits and services.” Section 1311(b)(1) of the ACA provides for the establishment of exchanges as follows:

Each State shall…establish an American Health Benefit Exchange (referred to in this title as an ‘‘Exchange’’) for the State that facilitates the purchase of qualified health plans...

But an Internal Revenue Service regulation that addresses Eligibility for Premium Tax Credit, known as the IRS Rule, extends premium payment assistance to anyone who is enrolled in one or more qualified health plans through “an Exchange.” And the Department of Health and Human Services utilizes the same definition of an “exchange” as the one in the Code of Federal Regulations: “any exchange, regardless of whether the exchange is established by a State or the Health and Human Services.”

Thus, the crux of the problem before the federal trial court was whether the word “exchange” means state and federal established exchanges, as the IRS Rule suggests, or only state established exchanges, as set forth in the ACA itself.

The court’s analysis and determination

The court’s holding came down to statutory interpretation, its examination of the language in the ACA. It opined that the ACA unambiguously provided for states to set up exchanges. The court rejected what the government asserted was Congress’ intent that the word “exchange” would encompass both state and federal marketplaces, noting that it—the court—did not have the authority to rewrite a poorly written piece of legislation.

The court buttressed its rationale by citing previous case law proclaiming that tax credits are a matter of legislative grace, and are only allowed as clearly provided for by statute, which is to be narrowly construed.

Implications

The Obama administration is likely to appeal this decision, in which case the Tenth Circuit Court of Appeals would hear it. Given the fact that there have been several other cases in the federal courts considering the same or similar questions, it is quite likely that eventually the Supreme Court will have the final say.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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