Tax reform included in Kasich’s Budget Proposal

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Click here to read the Kasich Administration’s summary of the budget bill package released on January 30th, 2017.

A summary of the tax provisions are outlined below.

  • The initial proposals in Gov. Kasich’s package most directly impacting Ohio businesses include:
    • Centralizing municipal net profits tax filings and payments through the Ohio Business Gateway versus the current process of filing directly with each Ohio city or village or its designated agency. The governor proposes one filing form, one uniform administration and appeals process through the Ohio Department of Taxation, and that information would be uploaded from commercial software packages. Individual municipalities would continue to set rates and determine tax credits, administer employer withholding and deal with individual filers.
    • The throwback rule used by a number of Ohio municipalities would be eliminated.
    • No increase in the Commercial Activity Tax rate for Ohio businesses. Suppliers to Qualified Distribution Centers (QDCs) would pay 10% of gross receipts on goods delivered to QDCs.
    • Reducing the personal income tax rate by an additional 17%, taking the top rate down to 4.33%. Of concern is that this decrease largely will be paid for by increasing another tax: the state sales tax rate will increase to 6.25% from 5.75%.
    • The proposal to expand the sales tax base to a limited number of services such as lobbying, cable TV, certain cosmetic surgeries, and others.
    • Shrinking the number of income tax brackets from 9 to 5.
    • Equalizing the tax on cigarettes to include other tobacco products.

Obamacare (And Net Investment Income Tax) Repeal

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On January 4th, the United States Senate voted 51-48 on a motion to move forward with a budget resolution which instructs the authorizing committees to submit legislation.  Included in the measure was a reconciliation instruction that would allow most of the Affordable Care Act to be repealed on a simple majority vote in the Senate instead of the typical 60 vote majority.  Democrats used the budget reconciliation process in 2010 to pass large parts of Obamacare to avoid a Republican filibuster, however, there may be other parts of the law that cannot be repealed under the budget reconciliation process.  President Obama made an appearance on Capitol Hill on the same day to meet with Democrats from both chambers and instructed them to not assist Republicans to develop a new healthcare law.  Thus, it is unclear what will happen to the parts of Obamacare that were passed with a 60 vote Senate majority in 2010 since Senate Democrats are unlikely to cooperate with Republicans in drafting replacement legislation.

Included in the 2010 reconciliation process was the 3.8% Medicare tax on net investment income (unearned income of individuals, estates and trusts) to help subsidize the health care law. Beginning with tax year 2013, Married couples filing a joint return with modified adjusted gross income (MAGI) in excess of $250,000 and single taxpayers with MAGI in excess of $200,000 have been subject to the additional 3.8% tax.  For example, a married couple with wages of $225,000 and investment income (interest, dividends, capital gains, etc.) of $125,000 currently owe an additional $3,800 ($225,000 + $125,000 – $250,000 x 3.8%) in taxes when filing their individual income tax return.  Conversely, a single taxpayer would owe $4,750 with the same facts (MAGI is greater than $200,000 before factoring in any investment income therefore the entire $125,000 is subject to the 3.8% tax).  It is expected that this tax will be repealed as part of the health care overhaul in what will likely be one of several reforms to the tax code under a Trump administration.