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Published: Tuesday, 3/11/2014

Gov. Kasich proposes tax changes

Aims hikes at smokers, oil and gas drillers, big businesses

Kasich Kasich

COLUMBUS — To help offset his goal of dragging Ohio’s highest income tax rate below the symbolic threshold of 5 percent, Gov. John Kasich today proposed hiking taxes on smokers, shale oil and natural gas drillers, and larger businesses.

His midway look at the current two-year state budget also includes proposals to step up job training efforts, expand college credit opportunities for high school seniors, and steer more veterans toward employment and college degrees.

Variations on the tax proposals have either been proposed before by Mr. Kasich or incorporated in a minor way into the final tax product approved last year by the Republican-controlled General Assembly in the current budget.

RELATED ARTICLE: Kasich wants income tax under 5%

The plan would take Ohio’s top rate from its current level of 5.3 percent to 4.88 percent over three years.

“We know what works — balanced budgets, tax cuts, better education and training, and a helping hand so everyone can benefit from a stronger Ohio,” the Republican governor said. “We’ve got to keep building on these ideas because they’re lifting our state, and with the continued partnership of the legislature, we’ll keep that progress going for Ohioans.”

But like his broad sales tax base expansion proposed last year, Mr. Kasich will likely face push-back from fellow Republicans on his broad hike and expansion of the cigarette tax to give the state the second-highest in the region.

Perhaps the biggest fight may be over the governor’s proposal to extend the cigarette tax rate to new electronic cigarettes, which so far have been subject only to the sales tax, as well as other products like cigars and chewing tobacco that have been taxed at lower rates than cigarettes.

The governor’s tax reform plan would also hike taxation on shale oil and natural gas drilling to a flat 2.75 percent of the producers’ gross receipts while providing carve-outs to allow well producers to recover their start-up costs. It would eliminate severance taxes on small conventional gas producers.

Local governments in the eastern Ohio region where shale drilling is occurring would get 20 percent of the revenue, a step in the direction of where House discussions are now.

This marks Mr. Kasich’s third attempt to get higher severance taxes passed. A more modest increase has been the subject of House hearings, but the governor has insisted it doesn’t go far enough.

The rate for the commercial activities tax, which is imposed on larger businesses, would be raised from 0.26 percent of gross receipts to 0.30 percent, its first increase since the CAT was created in 2005 to replace several other unpopular business taxes that were phased out.

Mr. Kasich’s budget director, Tim Keen, is expected to begin the job of selling the tax package to lawmakers on Wednesday with an appearance before the House Ways and Means Committee. The bill is expected to be carried by the committee’s new chairman, Rep. Jeff McClain (R., Upper Sandusky), whose district reaches as far north as southwestern Seneca County.

The plan would raise the cigarette tax by 60 cents over two years — two installments of 30 cents — to ultimately give the state a tax of $1.85 per pack. Ohio would remain below the $2 imposed by Michigan but would leapfrog Pennsylvania at $1.60.

Anti-tobacco activists have long urged lawmakers to hike the tax on cigarettes and to broaden its base to include other lesser-taxed tobacco products like cigars, roll-your-own cigarettes, and chewing tobacco. But even some of them don’t support Mr. Kasich’s proposal.

Their goal has been to use the tax to discourage smoking, and 30 cents a year doesn’t cut it, some of them say.

“You need a tax in a sufficient amount to have a public health effect,” said Shelly Kiser, of the Ohio Lung Association. “You need at least 50 cents at a time or you do not encourage people to stop smoking, If it’s less than that, we don’t support it.”

An estimated 23 percent of Ohioans smoke, the 10th highest rate in the nation.

Although Mr. Kasich wants to use the additional revenue raised from the hike to underwrite his income tax cut, anti-tobacco activists have buoyed by his call in his recent State of the State address to renew Ohio’s fight against smoking. He plans to use a pot of tobacco settlement dollars that has recently been released from a dispute with tobacco companies.

That marked a turnaround in the state’s position after it shut down its anti-smoking foundation and confiscated its tobacco settlement funding several years ago during the depths of the recession under then Gov. Ted Strickland.

The call for a cigarette tax hike comes as revenue from the existing tax has been faltering. For the first eight months of the current fiscal year through February, cigarette tax collections are off $809,000, or 0.2 percent.

This has occurred at the same time that income tax collections are running nearly $281 million, or 5.4 percent above projections. Overall tax collections are running a more modest $217.3 million, or 1.7 percent, ahead of projections.

Beth Wymer, executive director of the Ohio Wholesale Marketers Association, said the hike in the cigarette tax, and particularly on other tobacco products, will drive people in border counties to other states like West Virginia, Kentucky, and Indiana with significantly lower rates. That’s a phenomenon that has benefited tobacco sellers in the Toledo area because of Michigan’s higher tax.

But she also said it makes no sense to ask smokers to essentially help pay for a tax cut for other Ohioans.

“Less than 25 percent of Ohioans smoke and just 4.6 percent use smokeless tobacco,” she said. “A very small part of the Ohio population is going to be paying higher taxation so everybody else in Ohio gets a tax reduction.

“At the same time, 49 percent of smokers have annual household incomes less than $25,000, and 41 percent of those using other tobacco products have household incomes less than $25,000,” she said.

Those households would see very little from an across-the-board income tax cut.

To make a point, the campaign of Mr. Kasich’s leading Democratic opponent in this year’s election, Cuyahoga County Executive Ed FitzGerald, sent pizzas to Statehouse reporters. The Blade canceled the order headed its way.

The move was made “to remind you that John Kasich's income tax cut plan only amounts to a couple of pizzas for middle class families,” said campaign spokesman Lauren Hitt. “However, if you fall within the top 1 percent, his tax cut could fund a round trip to Rome to eat pizza under the Colosseum.

“Not to say we don't have great pizza here in Ohio, but that just doesn't seem fair,” she said.

To help the governor’s goal last year of lowering the income tax by 10 percent over three years and 50 percent on the first $250,000 earned by small businesses, the General Assembly applied the cigarette tax to small cigars known as cigarillos and raised the minimum payment required under the commercial activities tax paid by larger businesses.

It also did a very slight expansion of the sales tax base, opting instead to raise the sales tax rate by a quarter of a cent on the dollar to raise the income needed.

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

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