Ohio Flat Income Tax: Budget Bill HB 96 Changes | GBQ

On June 25, the Ohio General Assembly passed a budget bill (HB96) to chart the course of state spending and revenue for the next two years. On June 30, Governor Mike DeWine signed HB96 and vetoed a number of tax-related provisions, just in time for the beginning of the next fiscal biennium that began July 1. For our prior updates on the budget process, see this article, which links to other past events.

What Tax Changes Are Included In Ohio's Budget Bill?

The budget bill makes the following tax changes:

1. Retroactively reduces the top income tax bracket for 2025 from 3.5% to 3.125% (applicable to income exceeding $100,000).
2. Implements a flat income tax starting in 2026, at 2.75%.
3. Disallows personal, spousal, and dependent exemptions and the joint filing credit for taxpayers with income exceeding $750,000 for 2025 and $500,000 for 2026 and thereafter.
4. Allows tiered pass-through entities to more efficiently claim credits for the elective pass-through entity tax (PTET) by permitting an upper-tier pass-through entity to file its own PTET return (Form 4738) to claim credit for PTET paid by a lower-tier pass-through entity.
5. Eliminates a number of sales tax exemptions, including those for:
   • Refrigerated food vending machines
   • Advertising material or catalogs that price and describe property offered for retail sale
   • Items purchased by a direct marketing vendor to be used in printing advertising material, and equipment used to accept orders (e.g., telephone, computers)
   • Any tangible personal property used to acquire, format, edit, store, and disseminate data or information by electronic publishing
   • Rental payments for cars provided to an owner of a vehicle that is being repaired, when the owner is reimbursed by a manufacturer, warrantor, or provider of a service or similar contract with respect to the vehicle being repaired
   • Telecommunications services that are used to perform the functions of a call center
6. Eliminates interest on refunds of sales/use tax paid pursuant to a direct pay permit.
7. Eliminates interest on county tax refunds while still requiring taxpayers to pay interest on late remittances.
8. Repeals the 25% refund of tax provided to electronic information service providers.
9. Caps the prompt pay vendor discount at $750 per vendor's license per month, rather than the current 0.75% of tax due. Remittances of tax on motor vehicle sales and leases are not subject to the cap.

Which Provisions Were Vetoed By Ohio's Governor?

The Governor vetoed provisions that would have eliminated sales tax exemptions for (i) newspapers, (ii) machinery, equipment, and material used in the production for sale of printed material, and (iii) copyrighted motion pictures, including those transferred solely for advertising. He also vetoed a provision that would have prohibited the Tax Credit Authority from granting a sales tax exemption for a new computer data center after October 1, 2025.

Regarding real property tax, the Governor vetoed a number of provisions, including one that would have prohibited school districts and political subdivisions from levying certain types of levies, and another provision that would have required county budget commissions to reduce school district property tax levies in certain instances where a district's carryover balance exceeded 40% of the general fund expenditures in the prior year.  In his veto message, the Governor said his administration “recognizes the great need for property tax reform in Ohio and will convene a working group that will include legislators, agency officials, school officials, community members, and property tax experts to ensure this critical topic is given the attention deserved.”

The General Assembly can override any of the Governor's vetoes with a 3/5 vote in both chambers, and the House will be in session on July 21 to consider doing just that.  In particular, the House will decide whether to override the real property tax vetoes as several trade organizations have requested.

If you have questions about how this budget bill could affect you or your business, contact your GBQ advisor or a member of GBQ's state and local tax team.

By John Petzinger, State & Local Tax Services

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