Ohio’s New Tax Laws – Good? Bad? or Just Okay?

In June Ohio passed a biennial budget bill which tinkered with the state’s tax laws. While the initial version of the law was very concerning for businesses and the Ohio economy, the final version is much more palatable. The following is a summary of the key provisions:

The Good:
• Small Business Investor Income Deduction – If there was a “Great” category this would be in it. This is a 50% deduction on an individual’s Ohio business income up to the first $250,000. This ultimately nets to over $6,000 of tax savings for owners maximizing the deduction. While this amount won’t turn around a company, it is a tremendous help to all the small businesses working hard in Ohio.

The Bad:
• Commercial Activity Tax Increase – Businesses grossing less than $1M in taxable receipts will not see an increase in their Ohio CAT. However businesses grossing between $1M and $2M will pay $650 more; $2M and $4M will pay $1,950 more; And greater than $4M will pay $2,450 more. We did not see an increase in the stated rate or an increase in the taxable base so while this isn’t horrible news it’s still a tax increase on businesses. Bad.

• Gambling Loss Deduction: Repealed – Federal law allows for a deduction of gambling losses as an itemized deduction up to the point of gambling winnings. Ohio’s taxable income starts with Federal Adjusted Gross Income which is before the itemized deductions. Since Ohio started profiting from the newly built casinos throughout the state it matched the Federal policy on allowing gambling losses to offset gambling winning. Unfortunately this new law never saw the light of day. It’s been repealed. While this will not be an issue for me as I never walk out until I’m thoroughly in the red (do as I say and not as I do), this is bad not only for the taxpayer but bad for the Ohio economy. This could be a meaningful edge for Ohioans to visit their Ohio casinos rather than the casinos in the neighboring states. Bad.

• Sales Tax Increase – In September the state sales tax rate will increase from 5.5% to 5.75%. This is separate from local sales tax which still applies. Bad.

The Okay:
• All Ohioans will benefit from a slight reduction in the individual income tax rates. The Ohio individual tax rates will be reduced by 10% over the next three years. This will take the highest marginal rate in Ohio down to 5.33% from 5.925%. This is still high compared to its neighbors: Michigan at 4.35%, Indiana at 3.4% and Pennsylvania at 3.07%. The rate is just slightly better than Kentucky’s highest rate of 6%. Furthermore Ohio is freezing the inflation adjustments on its tax brackets and it is taking away the $20 personal exemption credit for taxpayers making more than $30,000. While Ohio should do more on this front we can’t label a tax cut as bad. So it’s OK for now.

There are a few other provisions dealing with individual income tax, sales tax, excise tax and property tax. The version of the bill that passed is significantly better than what was initially proposed. Considering where this effort started Ohio businesses and residents are in a better spot. However there is more work for the state to do. Perhaps this is the first step.