House Passes Budget; Now On To the Senate

The Ohio House of Representatives completed the second leg of the budget process Tuesday with passage of House Bill 49, the state’s biennial budget. It is now the Senate’s turn to deliberate and put its stamp on the budget.

The fiscal conditions changed quite a bit during the time the budget was in the House. Gov. John Kasich, Speaker Cliff Rosenberger and Senate President Larry Obhof held a press conference several weeks ago to bring attention to the fact that state revenues were coming in below estimates.

Just yesterday, it was announced revenue collections for April were $159 million below projections – bringing the shortfall for the current fiscal year to almost $774 million. With sluggish tax collections now an ongoing trend, lawmakers acknowledged they would need to reassess the financial assumptions on which they’re crafting the new budget, and announced that they would immediately look to reduce spending by $400 million each fiscal year from what was in the governor’s original executive budget proposal.

To help get there, the House made across the board budget cuts of 1.5 percent. A few areas were spared reductions, however, with funding to address the opioid crisis actually increased by $170 million and K-12 education getting $90 million more.

The only significant income tax reform remaining from what the governor proposed was the collapsing of the number of personal income tax brackets from nine to seven. This was accomplished by eliminating the bottom two brackets. The new lowest bracket will now begin at $10,000.

The rest of the proposed state tax reform package, which lowered all the other income tax rates and would have delivered a $39 million net tax cut, was removed. This means the House rejected the proposal to increase all of the following taxes: sales, oil and gas severance, tobacco products, and beer and wine. Also included was the plan to expand the sales tax to several services not currently subject to it. The governor’s tax package was opposed by the Ohio Chamber and we applaud the House for eliminating it.

The House-passed budget also removed the governor’s proposal for centralized collection of municipal income taxes on business net profits, which the Ohio Chamber strongly supported. It substituted instead a proposal to allow a business to file a single annual return through the Ohio Business Gateway. Importantly, the House did preserve eliminating the throwback rule. These beneficial changes will simplify filings, saving Ohio businesses time and money that is better served growing business and creating jobs.

One positive addition by the House to the budget is a requirement that political subdivisions must pay property owners’ attorney’s fees and court costs if the subdivision appeals a property tax assessment case and loses. This common sense reform should cause these entities to think twice about challenging property tax valuations that property owners themselves do not object.

The House also made important clarifications to how several existing taxes are applied. The law will now specify that sales of automatic data processing, computer services, electronic information services and electronic publishing are not the true object of the transaction and not taxable under the sales tax when they are provided primarily for the delivery, receipt or use of another nontaxable service. Another new HB 49 provision prohibits the Department of Taxation from taking any action to subject something to taxation that the department had not considered part of the tax within three years of the effective date of the tax. There has been ongoing concerns about this type of interpretation from the department.

With the House having wrapped up its work on the budget, the Senate will now have only about six weeks to complete its own review and revise process. More changes – both to spending levels and policy aims – are certain. Just yesterday, Senate President Obhof stated, “I think the Senate will significantly decrease the amount of money being spent in this budget.”

Though unlikely, there is also some speculation that an adjustment to the small business income tax deduction may be considered at some point – probably during conference committee after the Senate passes its version of the budget – if additional revenue is necessary in order to balance the budget. Any such change would be a tax increase on small business owners.

For now, however, the Ohio Chamber is generally pleased with the adjustments made by the House to HB 49, and will continue to focus going forward on preserving the important municipal income tax reforms the bill still contains.