Kasich proposes income tax cut with new budget

Seeks hikes in sales, tobacco, and alcohol taxes

1/30/2017

COLUMBUS — Gov. John Kasich today proposed a $66.9 billion, two-year budget that promises a modest income tax cut over the next two years while seeking hikes in taxes on sales, tobacco, alcohol, and shale oil and natural gas production.

The Republican governor proposed collapsing the number of Ohio income tax brackets from nine to five, addressing criticism by some conservatives of the state’s progressive tax system that imposes higher rates on higher incomes. In the past, Mr. Kasich has largely pursued across-the-board cuts affecting all existing brackets.

The state’s current highest tax rate, for those earning more than $210,500, is just under 5 percent. The rate for the new highest-bracket, those earning more than $200,000, would drop to 4.75 percent this calendar year and then 4.33 percent in 2018.

But the governor is again seeking to shift the state’s tax burden away from income toward consumption by asking lawmakers to expand the sales tax base while raising the tax rate from 5.75 percent to 6.25 percent.

Mr. Kasich has proposed expanding the sales tax to a handful of professional services, a far cry from the broad expansion on professional services he sought without success several years ago. He would impose the tax on lobbying, repossession, elective cosmetic surgery, interior design, landscape design, and travel packages.

Lawmakers have largely rejected overtures in the past to expand the sales tax base and raise taxes on oil and gas production.

“You ask for a lot, and you get a little, but a little’s better than none…,” Mr. Kasich said. “All taxes are not equal…Some might be cynical and say why does he keep putting this severance tax in when he knows it’s not going to pass…I don’t believe this legislature is going to enact higher severance taxes, but the day will come when they will.”

Overall, income taxes would decline by nearly $3.2 billion over the two years, but that would be almost entirely offset by increases in the other taxes. When it shakes out, the administration predicts that Ohioans would see a net tax cut of $39 million.

The ball will move to the General Assembly’s court on Tuesday. Judging from past budgets, Mr. Kasich will likely get a lot of what he wants. But he and lawmakers have differed in the past on big issues like tax reform, how to divvy up limited dollars among schools, and expansion of Medicaid.

Not since his first budget in 2011 — in which he walked into an anticipated multi-billion-dollar, post-recession revenue shortfall — has the Republican governor faced a budget this tight.

Late last year he warned lawmakers that Ohio is on the “verge of recession.” Since then several states heavily dependent on the energy sector have officially slipped into recession even as the nation as a whole has continued to see sluggish but persistent growth.

The state is sitting on budgetary reserves of about $2 billion. The balance of that recession-depleted rainy day fund had dropped to less than one dollar when he first took office, and he has been adamant against it during a time of drizzle as opposed to downpour.

A final budget must reach the governor’s desk before the end of the current fiscal year on June 30.

Democrats have at least partly blamed the state’s budget woes on past broad income tax cuts that they’ve argued have not generated the job growth the administration and have come at the expense of schools, local governments, libraries, and children and adult protective services.

Mr. Kasich and the Republican-controlled General Assembly have cut income taxes paid by individuals and small businesses in every budget so far, totaling $5 billion. That was on top of a 21 percent gradual cut that was set in motion in 2005. They’ve also eliminated the estate tax, the bulk of which benefited local governments.

In addition to reducing the number of brackets, the budget will again target some of the tax breaks to middle and lower-income earners, raising the income tax personal exemption from $2,250 to $3,000 in 2017 for those earning less than $40,000 a year and from $2,000 to $2,500 for those earning between $40,000 and $80,000.

The administration said that, between this change and the changes in the tax brackets, 350,000 more Ohioans will not pay income taxes.

The governor is seeking a 65-cents per pack increase in the cigarette tax, bringing the rate to $2.25. He also wants to raise taxes on other types of tobacco products, including e-cigarettes, to an equivalent rate.

Anti-tobacco activists immediately the hike won’t be enough to significant impact smoking rates. They had sought an increase of $1.

Meanwhile, the American Vaping Association accused the governor of trying to undercut smoking cessation efforts by seeking to increase taxes on e-cigarettes. Currently, such products are subject only to the state sales tax.

The governor wants to use the state’s separate transportation budget, which must pass by April 1 separately from the general fund budget, to make Ohio a leader in driverless vehicle research. It would add “smart,” fiber optic-equipped corridors to test the technology on I-90 near Cleveland and the I-270 beltway around Columbus to the already announced Ohio Turnpike and State Route 33 west of Columbus.

He has proposed investing $45 million in expanded research efforts at the Transportation Research Center near the Honda plant in East Liberty.

The governor has proposed spending $10.6 billion a year by the second year of the budget for K-12 schools, a modest increase of a little more than 1 percent a year in basic subsidies for K-12 schools, or about $200 million over the biennium.

While cautious in their initial comments, school groups made it clear they will urge lawmakers to do better than what Mr. Kasich has proposed.

“The bottom line is this: Does a district have the necessary resources to serve its students? What programs and courses can be offered to students?” said Damon Asbury, director of the Ohio School Boards Association. “There are still disparities in the education opportunities available to students among the districts across the state. We want to see this budget continue to make strides in helping all students succeed.”

The administration, however, did not release numbers on how the formula would drive funding to individual school districts, and that often is where the fight with lawmakers takes place.

The administration promises no district will receive less money than it did this school year, unless it lost more than 5 percent of its enrollment over the last five years. Districts that fall into that category would see their basic state aid reduced by 1 percent for each percentage point of enrollment loss above 5 percent.

Mr. Kasich proposed putting three non-voting business representatives on each of the state’s 600-plus school boards, as he continues to push for a blurring of lines between high school diplomas, college degrees, technical school certificates, and on-the-job-training.

He is again proposing a freeze in tuition and fees at public universities and colleges for both years — over opposition from the schools. The schools will also have to provide the textbooks it requires for students beginning in the fall of 2018. They could charge a fee of up to $300 to partly compensate what it estimates is now a $600 a year cost paid by the students.

The two-year budget anticipates continuation of Ohio’s partnership with Obamacare to fund nearly all of the state’s expansion of income eligibility for Medicaid, a move that has provided health coverage for about 700,000 more middle and lower-income families. But it’s unclear how secure that expansion is given the announced intent of President Donald Trump and the Republican-controlled Congress to repeal the federal Affordable Care Act without knowing what will take its place.

The governor proposes to charge monthly premiums, estimated at $20 a month, of childless, non-pregnant adults with incomes above the federal poverty level. The amount of the monthly premiums would be capped at no more than 2 percent of the family’s household income. The state anticipates savings of $200 million over the two-year budget as a result.

A new fee would be imposed on all major managed-care service providers in the state, regardless of whether they serve Medicaid programs. This is in reaction to the federal government’s crackdown on the state’s practice of imposing its sales tax on Medicaid-only managed care services as a means of drawing down additional federal Medicaid dollars.

This fee is expected to raise $615 million a year for the state, more than the $597 million it will lose in taxes under the federal crackdown. While this takes care of the state’s share of the problem, it doesn’t address the fact that sales-tax collecting local governments and transit authorities stand to lose $400 million over the biennium.

Mr. Kasich’s proposal instead seeks to help them wean themselves off this revenue source. It would cover the entire $49 million for the last quarter of this calendar year, the point at which the impact of the federal decision will first be felt.

It proposes replacing the $158 million of the second-year, roughly $200 million loss. Funding would be distributed based on how dependent the county and transit authorities are on this revenue.

Lucas County has estimated that it would lose $10 million a year.

Contact Jim Provance at: jprovance@theblade.com or 614-221-0496.