Posted: 1:05 p.m. Monday, Feb. 4, 2013

Kasich proposes cutting Ohio’s sales tax, expand Medicaid

Tax Base
Kasich says the inequitable structure of the sales tax, where most goods are taxed but only a few services are, does not reflect the modern economy where services are almost two thirds of all consumption spending, and it distorts consumption decisions between goods and services. The new tax plan is meant to balance the disparity. See a larger version of this chart


Kasich proposes cutting Ohio’s sales tax, expand Medicaid photo
Jay LaPrete
Ohio Gov. John Kasich presents the fiscal year 2014-15 executive budget proposal during a news conference Monday, Feb. 4, 2013, in Columbus, Ohio. (AP Photo/Jay LaPrete)
Kasich proposes cutting Ohio’s sales tax, expand Medicaid photo
Jay LaPrete
Ohio Gov. John Kasich presents the fiscal year 2014-15 executive budget proposal during a news conference Monday, Feb. 4, 2013, in Columbus, Ohio. (AP Photo/Jay LaPrete)

By Laura A. Bischoff and Andrew J. Tobias

Columbus bureau


Ohio Gov. John Kasich wants to cut some taxes and raise others in a budget plan that dramatically increases money for schools and extends federally funded Medicaid coverage to hundreds of thousands of Ohioans.

Kasich’s plan calls for cutting the state income tax by 20 percent, the state sales tax by half a percentage point and the taxes paid by most small businesses by 50 percent. But he also wants to increase taxes on companies harvesting oil and gas in Ohio and apply the sales tax to a wide swath of services that are currently exempt — including utilities, veterinary services, online downloads and cable.

Overall, the state would spend $127.8 billion out of all its funds in fiscal years 2014 and 2015, including $63.5 billion out of the general revenue fund. Overall spending will increase 6.12 percent in fiscal year 2014 and another 4.79 percent in fiscal year 2015.

“The ability to reduce taxes in our state and to encourage small businesses to have greater economic growth I believe will allow us to keep our economic momentum going, despite the headwinds that come from Washington,” Kasich told reporters Monday.

The budget will be introduced in the Ohio House next week. Once the House reworks and approves it, the Senate takes a crack at it. After months of deliberations, modifications and debate, a final version will be adopted some time in June before the fiscal year begins July 1.

The state’s economy has rebounded enough that Ohio has rebuilt its rainy day fund from less than $1 to a projected $1.46 billion by the end of the current fiscal year. Kasich also plans to add another $500 million from a bond sale tied to JobsOhio and state liquor proceeds, leaving around $1.9 billion in the state’s rainy day fund.

Kasich plans to shift a chunk of money from the rainy day fund to the income tax reduction fund, which automatically returns money to Ohio taxpayers. It’ll be the first time since 2000 that the tax cut will be automatically triggered.

Conservative Republicans are bound to embrace Kasich’s proposed tax cuts, but may give a cold shoulder to tax hikes and expanding Medicaid, which is a state and federally-funded health care plan that already serves 2.2 million Ohioans. Conservative policy groups have argued expanding Medicaid ensures the continued growth of government spending.

“The positives of the tax cut are outweighed by Medicaid expansion, a massive increase in spending and tax cuts funded by tax hikes,” said Matt Mayer, president of Opportunity Ohio, a conservative think tank. “I think he just dropped a big mess on the laps of the legislature to untangle.”

On the other side of the aisle, liberals are already complaining that Kasich’s budget doesn’t restore cuts he made to local governments and schools two years ago. Policy Matters Ohio, a left-leaning think tank in Cleveland, issued a report calling on Kasich to increase income tax rates for the top earners and require businesses to pay a larger share.

Zach Schiller of Policy Matters said expanding the sales tax to include services makes sense but the business tax cut is not precisely targeted and the income tax cut will disproportionately benefit wealthy Ohioans. “We are generating new revenues only to give it away to people who don’t need it, by and large,” he said.

Senate Democrats said the governor glossed over what would end up being a $5 billion sales tax hike over the next two years.

“These tax increases will hit middle class Ohioans especially hard,” said state Sen. Tom Sawyer, D-Akron. “If the governor’s plan is approved, Ohioans will have to pay additional sales tax when buying a home, watching cable TV or even using a coin operated laundry.”

Kasich’s tax reform package calls for a net tax cut to Ohio taxpayers and businesses to make the state more business-friendly. Essentially, Kasich wants to shift Ohio’s tax structure away from income and toward consumption of goods and services. The entire package amounts to a $1.4 billion tax cut over three years, according to the Kasich administration.

* Business tax cut: Small business owners and investors would see a 50 percent tax cut, which would mean $1.9 billion less government revenue over three years. The tax break would come in the form of a new deduction that would allow small business owners to lop off 50 percent of the tax they pay on the first $750,000 in earnings. Roughly 98 percent of small businesses fall below this category of earnings.

* Income tax cut: Personal income taxes would be cut across the board by 20 percent over three years, which would reduce revenue to the state by $2.1 billion over that time period. Ohio’s top income tax rate — for Ohioans making more than $204,000 a year — from 5.925 to 4.74 percent. It is a progressive tax, meaning the more someone earns, the higher the rate.

* Sales tax cut: Kasich proposes dropping the state sales tax rate to 5 percent from 5.5 percent and expanding the tax to services currently exempted, such as utilities, legal, accounting, engineering and other professional services. Other services such as medical, housing and education services, would remain untaxed. The proposal also cuts sales tax rates set by counties and transit agencies, but guarantees at least 10 percent more sales tax revenue over the next two years, and 15 percent more in three years.

* Oil and gas taxes: Kasich is once again proposing to raise the severance tax to help pay for income tax cuts. Conventional, low-production natural gas wells would be virtually exempt from the tax. Higher-volume natural gas wells would pay the lesser of 1 percent of the value or 3 cents per million cubic feet. Severance taxes on oil, condensate and natural gas liquids pulled from new horizontal wells would be taxed at 1.5 percent of their value for a year and then 4 percent in subsequent years. Kasich argues that these rates are still lower than in nearby states but could bring in as much as $413 million by fiscal year 2017.

Highlights of Gov. Kasich’s proposed budget

* Expand Ohio Medicaid to cover an additional 450,000 low income people under the federal Affordable Care Act and simplify the program eligibility system.

* Impose a 2 percent cap on public college tuition and fee increases for two years and tie more state funding for higher education to graduation rates rather than just enrollment.

* Reduce individual income tax rates by 20 percent, give a 50 percent tax break to small businesses on the first $750,000 in earnings, reduce the state income tax rate to 5.0 percent but apply it to more services that are currently exempt, and revamp the taxes imposed on oil and natural gas extraction.

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