Gov. Mike DeWine has signed the 2022-23 Ohio budget into law, producing notable income tax provisions for Ohioans. The nearly 1,000-page budget includes plans for additional funding to schools, grant programs to help Ohioans obtain internet services and additional training for law enforcement. Despite the expansiveness of the document, the core alternation can be observed in Ohio’s newest tax reform. The budget, initially approved on Monday by a bipartisan General Assembly, will retroactively take effect on Jan. 1, 2021.
$1.6B in Income Tax Cuts for Ohioans
Widely endorsed by Ohio lawmakers is a standardized 3% tax cut for all tax income brackets. The decision came as a resolution between the Ohio House and Senate following major debates demanding the tax cuts fall somewhere between 2% and 5%. While the tax cuts are a positive change for all Ohioans, those with income over $110,00 will see the most returns. State lawmakers have paired the uniform tax cuts with the removal of the previous maximum tax bracket, lowering the marginal tax rate for income over $110,651 from 4.413% to 3.99%. The removal of the maximum tax bracket, which previously taxed income between $110,651 and $221,201 at a rate of 4.797%, officially takes Ohio’s tax code from nine brackets to four in less than a decade. Although the budget suspends inflation adjustment of the new four tax brackets, lawmakers have remained silent on its effect on the marriage penalty.
It is not just the wealthy that will benefit from Ohio’s newest tax reform. In addition to removing the highest bracket, the lowest bracket was raised to a threshold of $25,000, eliminating income tax for anyone making below that amount per year. This change will increase the number of eligible Ohioans precluded from income tax by 125,000. This expansion will save each qualifying individual upwards of $400 a year. Collectively, the tax provisions will save Ohio taxpayers more than $1.6 billion, making the new budget one of the largest modifications in Ohio history.
Business Tax Breaks
As an additional benefit, Ohio is now more appealing than ever to external workers and businesses. The newest changes make Ohio the second lowest taxing state compared to its neighbors, with only Indiana coming in ahead. The budget includes a sales tax exemption for employment placement services, as well as income tax deductions for capital gains on investments in certain venture capital firms in the state. The new budget also eliminates Ohio’s Tax Expenditure Review Committee, which was created in 2016 and required to evaluate tax breaks every eight years to recommend whether they should be renewed, modified or repealed.
In addition, the budget creates several new programs while modifying existing programs that could provide significant financial support for real estate development projects.
Municipal Income Tax Refunds for Remote Workers
State income tax was not the only tax affected by the newest budget. With many Ohioans working from home during the COVID-19 pandemic, the budget also overturns a House Bill that previously allowed the continuation of municipality tax on remote workers. Before the new budget, any individual working remote was required to pay a municipality tax on their income to whichever jurisdiction their office was located, despite never entering the building or city limits. Although attempts to fight the tax in the early days of the pandemic were made, workers were unsuccessful. The budget addresses the issue, reversing the policy favoring additional tax, while also creating a provision that allows individuals to file for refunds for any taxation that occurred in 2021. Whether local governments will need to issue refunds for 2020 will be left for the courts to decide.
Other Ohio Budget Changes
Provisions in the budget are doing more than altering the tax code. A large change is the enactment of the Fair School Funding Plan, which will reform the entire funding process for K-12 public schools. Lawmakers believe these changes will ensure public schools are receiving adequate assistance through the state, rather than relying on local tax levies each year. The education changes reach beyond schools to also fund additional education and training for law enforcement, as well as an extensive grant to assist in the expansion of internet cables across the state. More information on the other provisions of the budget can be found here.
If you have questions or would like to discuss further, contact Kevin O’Connor at kto@kjk.com or 216.736.7213, or reach out to any of our Tax professionals.