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Budget plan addresses muni tax rules, employment services exclusion

Written on Jun 3, 2021

OSCPA staff report 

The latest draft of Ohio’s budget bill contains several OSCPA-advocated items that will improve the state’s business climate, including revised pandemic-related municipal income tax withholding rules and eliminating the sales and use tax on employment services. 

Society Tax Policy Director Greg Saul, Esq., CAE, applauded the extension through the end of this year on the temporary municipal income tax withholding provision, as well as clarification that the move was not intended to apply to taxability. 

“This change will allow qualified employees to receive a refund of (as it stands now, both 2020 and 2021) taxes withheld to a municipality where they neither lived nor physically performed services,” Saul said in written testimony this week to the Senate Finance Committee. “The substitute bill also provides that the net profit tax payroll factor should be calculated at the principal place of work location through the end of 2021.  

The Ohio Senate Finance Committee on June 1 released the substitute bill, which is its version of Substitute House Bill 110, the state’s biennial budget. This massive piece of legislation includes not only policy issues, but also funding for all state operations from July 1 this year through June 30, 2023. 

OSCPA-supported provisions include: 

Sales and use tax exclusion for sales of employment services: The Senate eliminated from the sales and use tax employment services (providing personnel to perform work under the supervision and control of the purchaser) and employment placement services (locating employment for a job seeker or locating job candidates for an employer). OSCPA previously recommended eliminating the taxability of these transactions in our 2016 Tax Reform Task Force report

Personal income tax rate reduction: This version of the budget replaces the House’s 2% across-the-board income tax cut with a reduction in nonbusiness tax rates of 3.5% for taxable years beginning in 2021 and an additional 1.5% for taxable years beginning in 2022, for a total 5% reduction. (The 1.5% reduction is calculated in comparison to tax year 2020 tax rates). This will save Ohioans an estimated $874 million and will include funding to immediately adjust tax withholding rates. The provision suspends the annual inflation indexing adjustment of income tax brackets and personal exemption amounts for taxable years beginning in 2021 and 2022. Indexing resumes in 2023. The Society also encouraged the legislature to continue future efforts to consolidate income tax brackets further from the current five. 

There was one provision in the bill the Society does not support: the elimination of the state Tax Expenditure Review Committee – its creation was also a recommendation of the Tax Reform Task Force report

Per the Ohio Constitution, the state’s biennial budget must be signed into law by July 1. A Senate floor vote is anticipated for June 10. The remainder of the month of June will be focused on conference  committee negotiations among the House, Senate and DeWine Administration.