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Ohio Enacts Budget With $1.6B Tax Cuts, Teleworker Refunds

By Paul Williams · Jul 1, 2021, 3:46 PM EDT

Ohio's governor signed a state budget Thursday that includes $1.6 billion in income tax cuts, a host of tax breaks for businesses and a provision allowing certain remote workers to claim local income tax refunds for 2021.

Republican Gov. Mike DeWine approved the $74 billion fiscal year 2022-23 budget, H.B. 110, early Thursday morning. The biennial spending plan lowers Ohio's top personal income tax rate from 4.797% to 3.99% while eliminating the top bracket and cutting the remaining three brackets by 3%, effective for tax year 2021. It also raises the income threshold before the lowest tax rate applies from $22,150 to $25,000.

"This is a budget that invests in Ohioans," DeWine said at a news conference, touting the spending plan as providing tax cuts across the board.

Senate President Pro Tempore Jay Hottinger, R-Newark, and House Finance Committee Chairman Scott Oelslager, R-North Canton, echoed DeWine's comments, telling reporters that the bill builds on tax cuts Ohio has enacted in prior budgets.

Although the budget received strong bipartisan support in the Republican-controlled General Assembly, some House Democrats sent the governor a letter Tuesday asking him to veto the income tax cuts, saying most of the $1.6 billion in tax relief over the biennium will flow to high earners. DeWine vetoed several nontax elements in the spending plan and did not directly address the letter at his news conference.

The budget also partially reverses a 2020 law that temporarily deemed remote work conducted during the coronavirus pandemic to occur at an employee's principal place of work, which allowed cities to impose local income taxes on workers who lived elsewhere and stopped commuting to their jobs. The budget specifies that provision offers withholding relief for 2021, allowing remote workers to claim refunds of taxes paid to cities on days when they worked elsewhere during the year.

However, the budget doesn't disturb the sourcing change for 2020. Local governments had cautioned lawmakers that compelling them to issue refunds for the closed tax year could have calamitous effects on their coffers. Whether refunds will need to be paid for 2020 will be left for the courts to decide, as remote workers have filed a slew of challenges to the law, arguing that it is unconstitutional for cities to tax them while they work in other municipalities.

Kent Scarrett, executive director of the Ohio Municipal League, told Law360 that the fiscal impact of allowing 2021 refunds is unknown because it will depend on how many residents opt to file refunds and what the tax rate disparities would be between their hometowns and their employers' cities. Scarrett said that while the league is grateful that the refunds are limited to tax year 2021, he would have preferred lawmakers to have left the issue alone.

"That's still a retroactive change," Scarrett said. "We think that the Legislature is not adhering to what the standards were set at it initially."

Businesses are also in line to receive a host of new tax breaks under the budget, which at the same time eliminates the state's Tax Expenditure Review Committee. The committee, created under a 2016 law, is required by statute to evaluate tax breaks every eight years and recommend whether they should be renewed, modified or repealed.

The spending plan includes 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.

Among the budget's other tax breaks are enhanced tax credits for "megaprojects," or companies that make at least $1 billion in investment or create $75 million in Ohio payroll. Businesses that supply qualifying amounts of materials to megaprojects could also qualify for the additional incentives, which would award job creation tax credits for up to 30 years rather than the normal 15-year period.

Republican Lt. Gov. Jon Husted highlighted the megaprojects provision at the news conference, suggesting it could woo large companies to set up operations in Ohio.

"We are in the game for these projects now," Husted said. "We were not in the past."

Ohio lawmakers considered similar tax incentives in other bills, which Zach Schiller, research director at Policy Matters Ohio, a progressive think tank, said were spawned by Foxconn's initial multibillion-dollar tax incentive deal with Wisconsin. That tax incentive package has since been sizably reduced after Foxconn failed to deliver on its investment promises. Some tax incentive critics have argued the Foxconn project underscores the risk that governments assume in sacrificing tax revenue in the hopes of spurring development.

In a statement, Ohio House Minority Leader Emilia Strong Sykes, D-Akron, criticized DeWine's rejection of the letter urging him to veto the tax cuts and other provisions in the budget, including the elimination of the committee to evaluate tax breaks.

Sykes said leaving those provisions intact will "prioritize giveaways to the wealthy over investing in Ohio's future."

John Fortney, a spokesman for the Ohio Senate majority caucus, previously told Law360 that evaluating tax expenditures is already part of lawmakers' jobs during the budget process.

DeWine spokesman Dan Tierney told Law360 on Thursday that the "Ways and Means committees of the Ohio General Assembly will continue to provide oversight" of the state's tax breaks.

--Editing by Neil Cohen.

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