Ohio Governor's Efforts to Eliminate Income Tax are Not Going Well

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In several recent Plain Dealer articles, the paper has reported that many Ohio lawmakers are opposed to Gov. Kasich’s endeavor to eliminate personal income tax while offsetting the revenue loss by increasing other taxes.

ne article explained that there are now three different budget plans: Gov. Kasich’s, the House’s, and the Senate’s. The governor’s original $138.7 billion budget sought a 23 percent income tax cut, which would be partially offset by increasing sales tax and commercial activity, tobacco, and fracking taxes, among other things.

HB 64, the 3,215-page bill passed by the Ohio House last week, offered its own $131.6 billion budget. It “gutted” much of Gov. Kasich’s proposal and drastically increased spending on other initiatives, like education. Though it now proceeds to the Senate, lawmakers there insist on starting from scratch. Sen. Scott Oelslager remarked, “Perhaps some of the House proposal, as well as the governor's proposal, will end up in our budget.”

The day after HB 64 was released, The Plain Dealer reported that Gov. Kasich was not very happy; his administration characterized the bill as a “missed opportunity” for tax reform, and a threat to Ohio’s economic recovery. It only reduces income tax by 6.3 percent (compared to 23 percent in the governor’s budget). “That would reduce Ohio's income tax rate from 5.33 percent to 4.99 percent on residents making more than $200,000 per year…” according to the paper.

In addition, it proposes spending $280 million more than Gov. Kasich did for primary and secondary education, and does not seek to raise sales taxes or commercial activity, tobacco, or fracking taxes to offset other decreases, as proposed in the governor’s plan.

Besides education spending, the other big “chunk” in HB 64 is Medicaid spending. The bill raises Ohio’s hospital franchise fee, resulting in more Medicaid matching funds from the federal government. Also, it continues the acceptance of federal funding for Medicaid expansion for another two years, after which the federal support will begin to wane.

Some say the House budget is “good news”

On the other hand, in a recent Tax Foundation essay, economist Scott Drenkard opines that HB 64 was a marked improvement on Gov. Kasich’s budget plan because the governor’s plan was “deeply in conflict with itself.”

Drenkard asserts that the internal conflict stems from the offsets the governor chose to utilize to balance the income tax reduction. Acknowledging that when done correctly, such “tax swaps…can reduce highly harmful taxes while offsetting revenue losses by leaning on less distortive taxes,” Gov. Kasich’s proposal “lean[s] on economically distortive, nontransparent taxes to make the ledger balance,” like the commercial activity tax (CAT). Drenkard has characterized a CAT as the most economically damaging and non-transparent offset. This is so, in part, because it has a pyramiding effect that ratchets up the final cost of goods for the consumer by taxing every step a product takes before reaching the end user.

HB 64 fixes this by keeping the CAT at its current rate. Other problems HB 64 avoids are “prohibition style levels” of cigarette taxes and the proposed 100 percent exemption of all pass-through business income. Drenkard warns that this would simply facilitate “opportunities for tax avoidance, as wage earners could reclassify themselves as small businesses to get big tax savings.”

The budget deadline approaches

Lawmakers have until June 30, 2015, to pass a unified budget, which Gov. Kasich can veto in whole or part. Despite the tight deadline, Senate GOP spokesman John Fortney does not think there will be a “massive fight.”

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