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Ohio Passes Budget With Tax Cuts, 2021 Telework Refunds

By Paul Williams · Jun 29, 2021, 5:51 PM EDT

Ohio lawmakers passed a biennial budget that would cut personal income tax rates by 3% while eliminating the top bracket, bar cities from imposing local income taxes on remote workers in 2021 and offer tax breaks for certain business investments.

The $74 billion fiscal year 2022-23 budget, H.B. 110, attracted bipartisan support in the Republican-controlled General Assembly on Monday evening, with the Senate passing the legislation by a vote of 32-1 and the House of Representatives approving it 82-13. The bill, which resulted from a conference committee agreement on competing versions of the legislation from the two chambers, will head to Republican Gov. Mike DeWine, who has line-item veto power.

Starting in tax year 2021, the budget would scrap Ohio's top personal income tax bracket with a rate of 4.797% and cut the next-highest bracket's rate of 4.413% to 3.99%, the new top rate. The three remaining lower rates would be cut by 3% across the board, and the income threshold before the lowest tax rate applies would be raised to $25,000 from $22,150.

"It's important for Ohioans to know that we believe it is their money first, and not the government's money," Senate President Matt Huffman, R-Lima, said in a Monday statement shared with Law360. The budget is estimated to offer about $2 billion in total tax breaks over the biennium.

Additionally, the budget would partially reverse a 2020 law permitting cities to impose local income taxes on employees who worked from home during the coronavirus pandemic. The budget would allow workers to claim refunds for tax year 2021 but not tax year 2020.

Currently, Ohio deems remote work performed during the pandemic to occur at an employee's principal place of work. But the budget would specify that for tax year 2021, that provision would provide withholding relief rather than determine an employee's location for municipal income tax liability. The budget would also end the withholding relief on Dec. 31, 2021.

When lawmakers considered rolling back the tax sourcing change, local governments urged legislators not to allow refunds for the closed tax year of 2020, saying a retroactive change could cripple municipal budgets. A slew of legal challenges to the 2020 sourcing change are percolating in the Ohio's courts, where noncity residents have argued that the cities are unconstitutionally taxing them while working remotely.

Richard Fry, a partner at Buckingham Doolittle & Burroughs LLC, said that while the budget may be intended to ease the financial strain on cities, it still leaves the door open for future challenges involving tax year 2020. Municipalities could still be on the hook for those taxes if the courts were to side with the taxpayers, he said.

"You can legislate around a lot of things, but you can't legislate around the constitution," Fry told Law360 on Tuesday. "To the extent that the tax would be unconstitutional, this would not save the municipalities in that regard."

Although many Democrats voted in favor of the budget, touting its school funding formula, they were also displeased with some of its tax provisions. On Tuesday, House Minority Leader Emilia Strong Sykes, D-Akron, and Rep. Erica C. Crawley, D-Columbus, sent a letter to DeWine calling on him to veto the income tax cuts, saying they would disproportionately favor high-earners.

"While this budget delivered for some, others were left behind with a tax giveaway that benefits millionaires and billionaires while working people see very little," Sykes said in a statement.

The letter also asked the governor not to permit local income tax refunds for 2021, saying that could cost cities millions of dollars and "pulls the rug out from under communities across Ohio by changing the intent of the enabling act." Additionally, the letter asked DeWine to veto a provision that would eliminate the state's Tax Expenditure Review Committee, which is required by statute to review tax credit programs every eight years.

DeWine's office did not immediately respond to a request for comment Tuesday.

The budget would also create a host of new tax breaks or incentive programs for businesses, including a sales tax exemption for employment placement services, which help find temporary jobs for prospective employees, and income tax deductions for capital gains earned from investments in certain Ohio venture capital firms.

Under the bill, "megaprojects," which must make at least $1 billion in investment or create $75 millon in Ohio payroll, could also be awarded certain tax credits for up to 30 years, rather than the current 15-year limit. Businesses that supply qualifying amounts of products to megaprojects would also receive a commercial activity tax exclusion. Lawmakers previously considered a standalone bill to provide those tax incentives, saying they would help entice investments from large companies.

Fry called the employment services tax exemption a good policy change, despite its projected $300 million revenue cost over two years, saying it could provide tax relief for staffing agencies while Ohio is trying to fill job openings, even temporarily, as it recovers from the pandemic. He also said that the blanket exemption would provide certainty for businesses, noting that several court cases have narrowed the scope of employment service companies that owe sales tax.

But Zach Schiller, research director at Policy Matter Ohio, a progressive research group, told Law360 that he believes the budget's tax exemptions and cuts are poor policy decisions, calling them a giveaway to business groups and high earners at the expense of low-income residents.

"They really larded on the tax breaks," Schiller said. "When you put the tax breaks and the income tax cuts together, it's a reduction of more than $2 billion over the biennium. We believe that this could be much better spent on public services."

A report the group put out in conjunction with the left-leaning Institute on Taxation and Economic Policy found that the budget's average personal tax cut for the bottom 80% of taxpayers, or those earning less than $107,000, would be $43 annually. Meanwhile, the wealthiest 5% of taxpayers, or those earning more than $228,000, would receive nearly 60% of the tax cuts' benefits, according to the report.

DeWine must act on the budget by Thursday, the start of the state's new fiscal year. 

--Editing by Vincent Sherry. 

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