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Ohio governor’s budget a blast from the tax-shifting past

By   /   February 4, 2015  /   News  /   No Comments

By Jason Hart | Ohio Watchdog

If the tax proposals in Ohio Gov. John Kasich’s budget sound familiar, it’s because most are recycled from budget plans dating to 2012.

To pay for state income tax cuts and exemptions, the Republican governor wants to hike the state sales tax, Commercial Activity Tax, cigarette tax and severance taxes paid by oil and gas drillers.

In his 2016-17 budget released Monday, Kasich proposed $2.5 billion in tax cuts and $2.3 billion in tax hikes for the 2016 fiscal year starting July 1, followed by $3.1 billion in tax cuts and $2.8 billion in tax hikes in fiscal 2017.

Including a cut to the CAT’s alternative minimum tax, Kasich’s two-year plan would result in a net tax cut of $523 million — less than the cost of two months of Kasich’s Obamacare Medicaid expansion.

Photo credit: Tax Foundation

Tax Foundation Economist Scott Drenkard

In a Forbes column last week, economist Scott Drenkard of the nonpartisan Tax Foundation criticized Kasich’s proposed small business income tax exemption as a “gimmick” and noted Kasich “has a track record of proposing handfuls of hikes to other damaging taxes to make the budget numbers add up.”

“Kasich is singularly focused on lowering the individual income tax rate, but he is pairing it with increases to other growth-quashing taxes,” Drenkard said in an email to Ohio Watchdog. “This is not tax reform, it’s tax shuffling.”

For fiscal 2016 and 2017, Kasich’s budget calls for a total of $138.7 billion in spending. Despite using tax hikes and a portion of rebounding state revenue to pay for income tax cuts, Kasich has increased spending dramatically since 2011.

“It is truly hard to believe Governor Kasich is proposing a budget that would result in a government spending increase of over 40 percent from his first year to his sixth year, largely funded by projected higher tax revenues and growing dependence on federal deficit spending,” Matt Mayer, president of free-market think tank Opportunity Ohio, told Ohio Watchdog via email.

“This marks the third budget devoid of making tough choices,” Mayer said. “Ohioans must now pray his rosy projections materialize. Governor Kasich simply can no longer claim to be a fiscal conservative — he is a tax shifting, big spending populist.”

Kasich’s proposed $1 cigarette tax hike — from $1.25 to $2.25 a pack — would give Ohio a higher rate than any of the five neighboring states. The governor presents his cigarette tax hike as a public health measure while seeking to tax smokeless e-cigarettes at the increased rate.

Kasich’s “mid-biennium review” last spring included a similar measure, with a much smaller 60-cent per-pack hike. As with other proposals Kasich revisited Monday, the Ohio General Assembly removed his last cigarette hike before approving the MBR.

Kasich also proposed a CAT hike last spring, suggesting a rate increase from 0.26 percent to 0.3 percent. At 0.32 percent of gross business receipts exceeding $2 million, the CAT hike in Kasich’s 2016-17 budget is even steeper.

Although the CAT was created only 10 years ago, promotional materials for Kasich’s 2014 MBR described a CAT hike as “Overdue Tax Reform.” A document published Monday calls for “The First-Ever Revisions to the Commercial Activity Tax (CAT) Rate.”

Meanwhile, the new budget’s proposed severance tax hike on hydraulic fracturing, or “fracking,” for oil and gas is Kasich’s fourth attempt at a severance tax hike and is bigger than he has ever requested.

In 2012, Kasich proposed a 4 percent tax on crude oil and liquid natural gas extracted by fracking. Kasich asked for the same rate in 2013, and he proposed a 2.75 percent gross receipts tax on fracking in 2014.

“The governor proposes fixed rates for crude oil and natural gas of 6.5 percent when sold at the wellhead, and a lower rate of 4.5 percent for natural gas and natural gas liquids when sold downstream,” budget documents released Monday explain.

A severance tax hike remains one of Kasich’s second-term priorities, even though an Opportunity Ohio study last month showed output from fracking wells in eastern Ohio has fallen far short of his projections.

Consistent with Kasich’s stated desire to shift from income to consumption taxes, his budget plan also proposes increasing the state sales tax from 5.75 percent to 6.25 percent and applying the sales tax to a number of currently exempt services.

The sales tax rate increased from 5.5 to 5.75 percent as part of the budget passed in 2013, after Kasich proposed cutting the rate to 5 percent.

In a February 2013 budget summary, Kasich said a rate cut “would reverse a long trend of increasing state sales tax rates either to raise general revenue or to compensate for the progressive narrowing of the sales tax base.”

Instead, the sales tax base was broadened to a long list of formerly exempt services and the rate was hiked to pay for income tax cuts when the General Assembly rejected the second iteration of Kasich’s severance tax hike.

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Jason was formerly a reporter for Watchdog.org