Despite Gov. Mike DeWine’s original plan to invest in Ohio’s future instead of further cutting taxes, Ohio lawmakers this week upped the ante on a tax cut plan for a third time in a matter of weeks.
At this rate, there’s no telling how big the cuts might become before the state budget is sent to the governor for his signature later this month.
The latest maneuver came Tuesday from the Republican-led Ohio Senate Finance Committee, which called for slashing Ohio’s income tax rates by 8% in two stages, and keeping in place a controversial tax break that allows self-employed people and many other businesses to pay no state income taxes on their first $250,000 of income.
To understand where the final tax plan might end up, it’s worth taking a look back at how things have evolved - with tax cuts growing from each legislative step in the process to the next.
Step 1 - Governor: no tax cut
DeWine, a Republican, introduced his version of what Ohio’s budget should look like in March, just weeks after taking office. In a notable change from his predecessor, John Kasich, DeWine did not issue a call to reduce Ohio’s income tax rates, which are down 30 percent since 2005.
DeWine pointedly did quite the opposite.
“We had tax cuts over the last eight years,” DeWine said introducing his budget. “There is a time and a place for everything, and this is a time and place to invest in Ohio and invest in Ohioans.”
Step 2 - House Finance Committee: some tax cuts
Once the budget reached the legislature, which earlier this year approved increasing Ohio’s gas tax by a dime a gallon, attention began to focus on cutting Ohio’s income tax rates.
The first stop was the House Finance Committee, which initially proposed eliminating income taxes for anyone with taxable income below $22,250, and providing tax cuts to all others.
The cuts for those above $22,250 were accomplished by reducing the tax rates by 4.7% on the portions of taxable income between $22,250 and $88,800.
But the savings would have been for all taxpayers. This is because even someone making $500,000 would have paid less for the portion of their income from $22,250 to $88,800.
Step 3 - Ohio House: bigger tax cut
But by the time the budget bill cleared the Ohio House May 9 with strong bipartisan support, the income tax cut was expanded to provide more savings for the highest income individuals. Instead of cutting just rates for the portions of income below $88,880 by 4.7%, all tax rates were trimmed by 6.6%.
This would mean tax savings of about $35 a year for someone making $25,000, $147 for incomes of $75,000, $455 for incomes of $175,000 and $1,039 for incomes of $350,000, according to cleveland.com estimates.
Part of this tax cut was paid for by reducing the tax-free status on business income to $100,000, from the current threshold of $250,000. A phased-in change under Gov. Kasich made the first $250,000 of business income, starting in 2016, tax free free for many businesses, including self-employed people.
This version of the budget bill was sent to the Ohio Senate.
Step 4 - Ohio Senate Finance Committee: yet a bigger tax cut
The first revision of the budget rolled out by the Ohio Senate Finance Committee on Tuesday includes both larger cuts in the tax rates - on a delayed basis - and restoration of the full $250,000 tax deduction for businesses, among other tax changes.
Instead of cutting tax rates by 6.6% across the board and applying the changes to the tax forms for 2019 Ohioans will fill out next spring, the Ohio Senate Finance Committee proposes cutting rates by 4% in the first year and another 4% in the second year for a total of 8%.
Tax bracket cutoffs for each higher rate would remain lower under the Senate plan, so the additional savings over the House plan are not quite as high as 8% would imply. But, overall, this would be a larger tax cut by the second year over what passed the House.
And, notably, the Senate Finance Committee proposes keeping the full $250,000 business income tax deduction, in conflict with the House bill that reduced that deduction to $100,000.
This would mean no state income taxes for a self-employed person with up to $250,000 in income, versus a bill of close to $10,000 for someone making the same amount of taxable income as an employee of a business.
What’s next? A bigger tax cut?
The budget bill still must pass the Senate Finance Committee and full Ohio Senate. Then, negotiations will settle differences between the House and Senate. All this must be done this month.
And the governor’s signature is needed before this becomes law. DeWine signaled Tuesday that he is in agreement with the direction the Senate is taking on the budget overall.
A lot could change. But, as the trend demonstrates, expect a tax cut.
See this link for previous Numbers Behind the News features.
Rich Exner, data analysis editor for cleveland.com, writes about numbers on a variety of topics. Follow on Twitter @RichExner. Find data-related stories at cleveland.com/datacentral.
