State budget includes massive shift from income to sales taxes

The two-year state budget announced last week includes a proposed to massively shift the cost of paying for government away from the income tax – the state’s most progressive tax, based on one’s ability to pay – toward more reliance on the sales tax. Here are the specific components of the plan:

Sales tax: net tax increase of $2.9 billion

  • Expand the sales tax to cover all “non-essential” services individuals and businesses purchase: raises $4.4 billion
  • Lower the sales tax rate from 5.5 to 5 percent: costs $1.5 billion

Income tax changes: net tax decrease of $4.3 billion

  • Lower income tax rates in all brackets by 20 percent over 3 years: costs $3.1 billion
  • Allow businesses to deduct half their income from the newly-reduced rates: costs $1.2 billion

Oil and gas severance tax: net tax increase of $200 million

  • For horizontal wells, increases the tax on oil extracted from $.20/barrel to 4%; converts tax on natural gas from $.03/MCF to 3%; waives all taxation for first year of operation: raises $200 million

Paired with natural growth in state tax collections from the ongoing economic recovery, the changes in law are expected to result in a reduction of $900 million over the next two years to the state’s bottom line. The choice to reduce tax revenue is occurring in the context of $1.8 billion in cuts to schools and $1 billion in cuts to communities during the last two-year period that have yet to be restored.

tax_shift_in_billions

Today, the Ohio House of Representatives will have its first opportunity to review the plan in detail, hearing testimony from Kasich Tax Commissioner, Joe Testa. A live stream will be available on the Finance Committee’s website. Follow us on Twitter for our live commentary on today’s hearing and continued budget analysis.