Huge Tax Cuts Included in Ohio Senate's Budget Bill (H.B. 33)
On Thursday, June 15, 2023, the Senate passed Substitute House Bill 33 (H.B.33), after having made changes to the House version through a substitute bill adopted by the Senate Finance Committee on June 6th, and further changes to the bill through an omnibus amendment adopted by the Committee before approving the bill on June 14th.
This Buzz focuses only on tax provisions of H.B. 33: what’s in, what’s out, and what’s been modified since the budget bill was passed by Ohio’s House of Representatives. This document covers most of the tax-related provisions, especially if they might have a direct impact on taxpayers.
Personal Income Tax (“PIT”)
TAX CUT: One of the headline provisions is the Senate’s further flattening, and reducing, of the PIT. The Senate has accepted the House’s combining of the lowest two brackets beginning in tax year 2023. Beginning in 2024, the Senate version combines the top two brackets as well, leaving just two brackets in tax year 2024 and beyond. The top bracket also receives a rate reduction in 2024. The 2023 brackets would be, for individual taxpayers:
o 2.75% for income over $26,050 till the next bracket
o 3.688% for income over $92,150 till the next bracket
o 3.75% for income over $115,300
The 2024 brackets would be, for individual taxpayers:
o 2.75% for income over $26,050 till the next bracket
o 3.5% for income over $92,150
The Senate version retains the House’s deduction for deposits into a homeownership savings account of up to $5,000 per year for individuals ($10,000 per joint return), to a lifetime maximum of $25,000 per contributor. Interest earned on such an account is also deductible.
The Senate bill retains the House’s deduction for payments received as a result of the East Palestine train derailment on February 3rd earlier this year.
The Senate has removed the House’s provision that recoupled the Ohio income tax with the bonus depreciation provisions with the Internal Revenue Code. (Don’t delete those spreadsheets yet!)
The Senate bill retains the change from quarterly to annual reconciliation reports for employers who withhold and remit income taxes on a partial weekly basis.
The Senate version removes the House’s $1,000 tax credit for volunteer first responders.
The Senate bill does not restore the Governor’s proposal to increase exemptions for dependents.
The Senate bill modifies Ohio’s resident tax credit by allowing PTE taxes paid to other states, either on a composite return or an optional PTE tax return into the credit calculation. This change will help Ohio business owners avoid double taxation on their business income earned in other states.
The Senate version modifies the credit for donations to a qualifying scholarship-granting organization such that a donation made before the unextended due date of the taxpayer’s tax return (i.e., April 15th for most taxpayers) qualifies for a deduction on the prior year’s tax return (similar to the federal deduction rules for I.R.A. contributions). Of course, this will not change when the taxpayer may claim a charitable deduction for federal tax purposes, which will remain the year when the contribution was actually made.
The Senate bill modifies the tax credit for tuition paid to a non-chartered, nonpublic school by removing the $100,000 income limitation for married couples and increasing the credit by $500.
Sales and Use Tax
TAX HOLIDAY: The Senate bill provides for a fourteen day sales tax holiday in September 2024. The sales tax holiday will apply to purchases of any item of tangible personal property with a purchase price of $500 or less. The holiday will not apply to the purchase of motor vehicles, a titled watercraft or outboard motor, alcohol, tobacco, vapor products or any products containing marijuana. In future years, a similar sales tax holiday may also be held, but will be contingent on the accumulation of at least $50 million in the new Expanded Sales Tax Holiday Fund. This fund will collect money from any surplus that builds up in the General Revenue Fund (“GRF”) after the annual target is met for the Budget Stabilization Fund (“BSF”, a.k.a. Rainy Day Fund). The BSF target is itself adjusted from the current 8.5% up to 10% of the GRF revenues for the preceding fiscal year. In essence, if tax revenues are sufficient to meet the target, the state will put any excess into the new Expanded Sales Tax Holiday Fund, which will cover the cost of expanding the annual sales tax holiday during the following fiscal year. The sales tax holiday would be up to 14 consecutive days, depending on the amount of revenue in the dedicated fund.
The Senate bill retains Governor DeWine’s request to exempt certain baby products from the sales tax, such as diapers, creams, car seats, and strollers.
The Senate bill removes the clarification to the provision exempting sales or rentals to government agencies stating that the exemption includes construction material and services for traffic control and drainage improvement. This provision essentially codified the holding in Karvo Paving Co. v. Testa, 2019-Ohio-3974.
The executive and House-passed versions of the budget granted the Tax Commissioner authority to suspend vendor’s licenses in certain circumstances, such as when a person got the license after having sold at retail without a license multiple times. The Senate bill removes this provision.
The Senate version removes the changes to the criminal provisions of the sales tax law found in Revised Code (“R.C.”) 5739.99
Commercial Activity Tax (“CAT”)
TAX CUT: After experimenting with a rate reduction in the initial sub bill, the Senate ultimately dropped that idea and opted to increase the exclusion from the first $1 million of taxable gross receipts to the first $3 million for 2024, and then to the first $6 million for 2025 and thereafter.
o The change will eliminate approximately 90% of all CAT filers (generally small businesses).
o The $6 million exclusion amount will be adjusted for inflation beginning in 2026.
o The CAT return which is usually due May 10th of each year for calendar year taxpayers (those with less than $1 million of taxable gross receipts) is also eliminated.
The Senate bill retains the House version’s gross receipts exclusion for grants or debts forgiven for the purpose of expanding broadband service in Ohio.
The Senate version removes the wording change in the CAT situsing provisions related to motor carriers. The executive and House versions had changed “motor carrier” to “common carrier” and “common or contract carrier” in divisions (E) and (G), respectively, of R.C. 5751.033.
The Senate bill does not restore the Governor’s original proposal to push back by 10 years the date at which the NOL transitional credit switches from a non-refundable to a refundable credit.
Under the Senate bill, heating companies will be subject to the CAT beginning July 1, 2023, and exempt from the Public Utility Excise Tax beginning with the 2024 tax year.
Municipal Net Profits and Income Tax, Ridesharing Tax
TAX CUT: The Senate version requires all municipalities to exempt stock option and nonqualified deferred compensation income from the municipal income tax. Many municipalities currently exempt this type of income, but this will place all municipalities on a level playing field and improve the ability of Ohio to attract workers that are compensated using stock options and deferred compensation.
The Senate bill removes the House-added provision that would exempt individuals under 18 years of age from the local income tax.
The Senate bill retains the House-added limits on notices to taxpayers with a filing extension in place, limits on failure-to-file penalties, and the taxpayer cost reimbursement for responding to erroneous notices.
The Senate bill retains the automatic one-month extension for a business that has a 6-month federal extension in place, giving taxpayers 7 months from the original due date to file municipal returns.
The Senate bill retains the information sharing requirements between the Department of Taxation and municipalities.
The Senate bill adds a provision allowing businesses with remote employees or owners to use a modified apportionment formula for taxable years beginning in 2024 or later.
The Senate version authorizes certain municipalities to levy a tax on ridesharing services, with the revenue to be used for economic development. At present, only Cincinnati qualifies.
Sports Gaming Tax
TAX INCREASE: The Senate bill restores the Governor’s proposal to double the sports gaming receipts tax rate from 10% to 20% as of July 1, 2023. The House had dropped this provision.
Financial Institutions Tax (“FIT”)
The Senate bill retains the changes to the definition of “financial institution” to read “all entities that are consolidated” in the FR Y-9 or call report and specifies that where a holding company is required to file a parent-only FR Y-9, “financial institution” includes the group the institution would include if it were required by the Federal Reserve Board to file a consolidated report.
In an effort to stave off the impact of large property value increases, the Senate bill modifies the procedures the Tax Commissioner must use in collecting data to perform sales-assessment ratio studies, including a prohibition on weighting any one year more than the others when studying the most recent three years of real estate appraisals. This will apply beginning in the 2023 tax year, even for properties that have already been appraised.
The Senate version also adds a provision requiring that the current agricultural use value (CAUV) of farmland, if reappraised or updated in 2023, 2024, or 2025, be valued at the average of that year’s calculated value and the values that would have been assigned in the two preceding years if the farmland was in a county that underwent a reappraisal or update in those years.
The Senate bill would limit, for five years, the tax exemptions granted in resolutions that adopt community reinvestment areas or tax increment financing (“TIF”) plans, to owner-occupied housing.
The Senate bill removes the indexing of the homestead exemption for inflation.
The Senate bill retains the allowance of the second and third publication of a foreclosure notice to be made online.
The Senate bill prohibits park district property from being included in a special improvement district without the park district’s consent.
The Senate bill authorizes the governing board of a Regional Transportation Improvement Project (“RTIP”) to enter into a memorandum of understanding with the Ohio Department of Transportation concerning infrastructure improvements within the RTIP’s development area.
o The bill specifies various economic development powers that an RTIP may use when acting under such a memorandum of understanding.
The Senate version removes the House bill’s prohibition of local governments levying replacement property taxes.
The Senate version retains the House’s 8-year exemption for the excess value of unimproved land subdivided for residential development over its value prior to subdivision, until development begins or the land is sold. However, the Senate version specifically disallows land that is no longer used as farmland to be valued as farmland.
The Senate version retains the House’s proposal to allow the transfer of a parcel from one TIF to another prior to the owner’s making any payments in lieu of taxes.
The Senate bill retains the House’s proposal to allow a pre-2006 TIF to be extended by up to 15 years provided certain conditions are met.
The Senate bill adds new language to modify the circumstances under which a political subdivision may extend a TIF by up to 30 years.
The Senate version aligns the notice and approval requirements for the creation of a Transportation Financing District (“TFD”) with those of a TIF.
The Senate bill removes the House’s prohibition of a 7.5% or greater reduction in the taxable value of an electric power plant’s tangible personal property from the preceding year’s value.
The Senate bill retains the House’s extension of the existing property tax exemption for qualified energy projects beyond 2025, but replaces the House’s contingent end date with the year 2029.
The Senate bill removes the other requirements proposed in the House bill regarding qualified clean energy projects.
The Senate bill retains the House bill’s authorization for owners of remediated brownfield development land to apply for an abatement of 2020 and 2021 taxes in certain circumstances.
The Senate bill removes the House-added provision that would require the Tax Commissioner to prescribe an income-based formula for uniform valuation of federally subsidized rental housing, and extends an existing provision that allows a county auditor to choose the income, cost or comparable sales approach in valuing properties receiving a federal low income housing tax credit to allow the same choice in valuing other federally subsidized residential rental properties.
The Senate bill removes the House bill’s creation of a Joint Committee on Property Tax Review and Reform.
The Senate retains the House bill’s authorization for the repurposing of lodging tax revenue, but limits its application to Cincinnati and the funding of a facility for a Major League Soccer team.
The Senate retains the House bill’s provisions authorizing an exemption, in counties with more than 800,000 residents, from lodging tax requirements for a hotel designated as the “headquarters hotel” for a convention center.
Fuel Use Tax
The Senate bill retains the imposition of personal liability on certain employees, officers, or trustees of a business required to file and pay the fuel use tax, if the business fails to do so.
The Senate bill removes the House-added provision to allow townships to use revenue from the motor fuel tax for the purchase of road machinery and equipment storage buildings.
The Senate bill retains the exemptions from CAT and sales & use tax of the 4% fireworks fee imposed by R.C. 3743.22.
Corporation Franchise Tax
The Senate bill retains the elimination of the requirement to file an amended report to show changes resulting from a federal income tax audit, and the disallowance of refund applications based on federal adjustments, beginning January 1, 2024.
Cigarette Excise Tax
The Senate bill adds an exemption for the receipt of vapor products, and for the storage, use, or consumption of such products, by an importer or manufacturer if they sell the products exclusively outside of the state.
The Senate version retains the House provision allowing a tobacco distributor to obtain a tax refund for bad debts.
The Senate bill retains the provision changing the annual license renewal deadline to June 1st.
The Senate version rescinds the authorization for the use of a rate of up to 9% of the wholesale cost of a pack of cigarettes, used by Cuyahoga County for its cigarette and vapor products tax. The county would be allowed to tax cigarettes at a flat rate per pack.
The Senate bill imposes an annual license fee of $125 per location on persons selling vapor and non-cigarette tobacco products, and imposes a $1,000 penalty for selling without a license.
Tax Credits and Economic Development Incentives
In addition to the many property tax related economic development changes described above, the Senate version of the budget bill also contains the following tax credits and incentives:
The Senate bill retains the changes to the Qualified Research Expenditures (“QRE” a.k.a. “R&D”) Credit allowed by Ohio against the CAT or the FIT. These changes include a requirement that an entity be a member of a taxpayer group on December 31 of the year in which a QRE was incurred, and an authorization for an Ohio Department of Taxation audit agent to use a representative sample when auditing the expenses used to calculate the credit.
As part of a new program, “Welcome Home Ohio,” the Senate bill authorizes the Director of Development to issue tax credit certificates to developers and land banks for the lesser of one-third of rehabilitation/construction costs or $90,000, for homes that will be sold to low income residents. The credits, which may be taken against the FIT or PIT, would be non-refundable but may be carried forward up to five years, and the certificates may also be transferred. $25 million in credits may be issued in each of FY 2024 and FY 2025 only.
The executive and House-passed versions of the budget increased the annual cap on the motion picture and theatrical productions tax credit from $40 million to $75 million. The Senate version retains the overall increase, but splits the cap into two distinct categories. The standard credit is capped at $50 million, with $5 million of that reserved for Broadway style productions. The other $25 million would be reserved for capital improvement projects by a production company. The latter credit is refundable and is earned by spending money to acquire, construct, repair, or expand facilities to be used in a motion picture or theatrical production. A maximum of $5 million may be awarded to projects in a single county per fiscal year.
The Senate version removes the provision maintaining the Historic Rehabilitation Tax Credit cap at $120 million, allowing the expenditure for this credit to revert to $60 million.
The Senate bill would not allow residential rental property receiving any federal subsidization to receive a Historic Rehabilitation Tax Credit.
The Senate version retains the executive and House-passed Low-Income Housing Tax Credit, though it changes the authority for reserving the credit from the OHFA director to the director of the Governor’s Office of Housing Transformation.
The Senate version restores Governor DeWine’s proposed credit for the development of affordable single-family housing. This provision had been removed by the House.
The Senate version retains the provision allowing the Tax Credit Authority to adjust the certified clawback amount in certain cases of noncompliance with regard to the Jobs Creation and Jobs Retention Tax Credits.
The Senate bill prohibits investments in rental housing from qualifying for the Opportunity Zone Investment Credit for five years from the bill’s effective date.
The Senate version permits multiple school districts to create a career-technical cooperative education district to fund such education for students in grades 7-12, and authorizes such a district to levy property taxes of up to 3 mills.
The Senate bill retains the House-passed language regarding the delivery of tax notices other than by certified mail. In doing so, it does not reinstate the Governor’s proposed allowable usage of e-mail, without prior taxpayer consent, for delivery.
We at ZHF will continue to monitor H.B. 33. The next step is likely to be a conference committee where the House and Senate will iron out their differences and then submit a final bill to Governor DeWine. The Governor will then review the bill for his signature. However, the Governor will likely use his line-item veto power to delete any changes made by the bill with which he disagrees. The budget bill process should be completed by June 30, 2023, but that remains to be seen.
Please contact any of our professionals with questions or concerns.