Ohio GOP agreement calls for larger income tax cut

COLUMBUS, Ohio (AP) -- Ohio residents could see a 10 percent income tax cut paid for in part by a bump in the state sales tax under a Republican package of changes meant to be included in the state's budget.

GOP legislative leaders in the House and Senate announced the proposal, which also gives small businesses a break and closes certain tax loopholes on small cigars and magazine subscriptions, on Thursday.

State lawmakers are working to finalize Ohio's next two-year budget. They face a June 30 deadline to pass the almost $61.7 billion spending plan before the new fiscal year begins July 1.

The plan reduces the statewide income tax rate gradually over three years, beginning with an 8.5 percent tax cut on income earned in 2013 and moving to a 10 percent tax reduction by 2015.

A tax break targeted at small businesses would let people write off 50 percent of their first $250,000 in business income annually. That's similar to what the Senate passed in its version of the budget, which would let people deduct 50 percent of their first $750,000 in income.

"Make no doubt about it, we are making significant changes," said Senate President Keith Faber, a Celina Republican, at an afternoon news conference at the Statehouse.

The plan amounts to a $2.6 billion net tax reduction over three years, including more than $1 billion in the next budget year, GOP leaders said.

Among other changes, the tax package also would increase the state sales tax from 5.5 percent to 5.75 percent and apply it to digital goods such as electronic books and music downloaded online.

Virtually every Ohio business pays the commercial activities tax, but the proposal would change the threshold on who pays what.

The change would have little impact on larger businesses. But it would apply the current tax rate to those businesses making $500,000 in gross receipts, instead of those making $1 million and above.

Another change would get rid of property tax help that the state currently pays to homeowners who are subject to local levies, such as school issues. The elimination of the so-called property tax rollback wouldn't apply to existing levies, only deductions for future homeowners and new local levies. The move is expected to save the state nothing in the first fiscal year, about $34 million in 2015 and about $90 million annually in the years that follow.

Democrats argued the effect of the changes amounted to a tax increase for most.

"All Ohioans will have to pay higher taxes every time they go to the store or buy a car thanks to this Republican tax hike," state Sen. Eric Kearney, a Cincinnati Democrat, said in a written statement.

Kearney said it also would make it more difficult for schools and communities to pass levies.

The tax package is aimed at reconciling the separate tax proposals that passed the two Republican-controlled chambers of the Legislature.

The House had retained 7 percent of the 20 percent permanent income tax cut originally proposed by GOP Gov. John Kasich. Senators chose to restore a small business benefit, which Kasich also had pitched in his budget.

The governor praised the proposal in a written statement Thursday.

"This is another big step forward in Ohio's comeback," Kasich said.

A conference committee of six lawmakers, three from the House and three from the Senate, has started hashing out the differences between the two chambers' spending proposals.

Both chambers' versions of the budget also had omitted Kasich's proposed tax increase on high-volume oil and gas drillers and his plans for extending the state sales tax to professional services including those provided by legal, accounting and lobbying firms.

A House committee is scheduled to hold a hearing on the new tax package on Friday, while a Senate panel plans to hear from witnesses on Monday.

The conference committee is expected to vote on a compromise budget bill early next week.