COLUMBUS — After rejecting Gov. John Kasich’s proposed broad expansion of the sales tax base, legislative Republicans today called for a hike in the sales tax rate and a scaling back of local property tax rebates to help underwrite a deeper income-tax cut.
The language is expected to be added Tuesday to what is now a $61.7 billion, two-year budget before a joint House-Senate conference committee. None of the tax hikes had been included in either chamber’s version of the budget that must reach Mr. Kasich’s desk by month’s end.
The plan would also slash the threshold that triggers higher payment of the state’s commercial activities tax, essentially an income tax on businesses, from $1 million to $500,000.
Republican leaders said the plan holds a net tax cut overall for Ohioans of $2.6 billion over three years.
“This is a tax-cut package,” said Senate President Keith Faber (R., Celina). “We did do some loophole closings and tax restructuring, frankly, to try to do flatter and fairer.”
Both the House and Senate-passed versions of the budget had featured income-tax cuts totaling $1.4 billion over two years, but the House would have spread those benefits to everyone across all tax brackets via a 7 percent rate cut. The Senate targeted the cuts exclusively to small business owners that pay the income tax with a 50 percent reduction on a share of their profits.
Mr. Kasich had originally proposed a plan that incorporated elements of both visions, but his plan had also included proposals to expand the sales tax base and hike taxes on shale oil and natural gas drillers to help pay for them. The latter proposals were rejected outright.
The new plan seems to try to meet the governor halfway. Republicans are embracing a flat quarter-of a-percent hike in the sales tax rate paid by consumers at the cash register, taking it to 5.75 cents on the dollar.
That would take the rate in Lucas County, with its local piggyback tax, to an even 7 cents on the dollar.
It would cut income taxes across the board by 8.5 percent in the first year. The cut would climb to 9 percent in the second year compared to the current year and then 10 percent in the third year.
It would also cut income taxes by 50 percent on the first $250,000 in profits earned by small businesses that pay the tax.
The governor and Republicans have argued that income tax cuts are the best way to fuel job creation by small businesses. Democrats, however, have countered that income tax cuts disproportionately benefit the wealthy while the proposed budget still hasn’t compensated K-12 schools and local governments for the major funding cuts they experienced in the current budget.
The curtailing of the local property tax rebates, known as the homestead exemption for owner-occupied houses, may be seen as another blow to both schools and local governments as they seek to convince voters to support future new levies and renewals of old ones.
The plan is to continue the homestead exemption for seniors now receiving it on existing tax levies and replacements. But over time, those newly entering the homestead exemption program would have to qualify based on their income to receive rebates against new tax levies.
Former Gov. Ted Strickland, a Democrat, had expanded the homestead exemption for all seniors, regardless of income.
Among the sales tax “loophole” closings are “digital goods”— movies, music, books, and other Internet downloads. Lawmakers stressed that the tax will be applied to retailers with some nexus to the state of Ohio and should not be considered a tax on the Internet.
The plan also includes an earned income tax credit by which low- and moderate-income families can offset part of their income tax, something Democrats had sought. But unlike the federal income tax credit, those who pay no tax would not be eligible for a refund based on the value of the credit.
Legislators on the committee received updated revenue estimates earlier this week and learned that they have nearly $400 million more to work with than had been expected. But all of that comes from one-time surplus dollars for the current fiscal year ending June 30, raising concerns about using it to finance permanent tax cuts.
Instead, Mr. Faber said that money will be used to cover the state’s costs as it adjusts employee withholding to reflect the new income tax rates.
Others have their own ideas of how the one-time pot of funds should be used. Senate Democrats want it to be spent on early childhood education in addition to what the budget already holds.
“If Ohio is to be a world-class leader, we must ensure that our children receive a world-class education,” said Senate Democratic leader Eric H. Kearney (D.,Cincinnati).