Ohio Governor John Kasich has unveiled his Mid-Biennium Review (MBR) and the best that could be said about it is that it contains the good, the bad, and the ugly.

First, the good. Gov. Kasich’s proposal enacts another round of income tax cuts in the State of Ohio, building upon the across the board 10-percent cut that he signed into law last year. All in all, Gov. Kasich’s new income tax cut would reduce the tax burden on Ohio taxpayers by $461 million in FY2015, $816 million in FY2016, and $909 million in FY 2017; totaling nearly $2.2 billion in tax relief over three years.

While the new round of income tax rate reductions is laudable. Ohio will continue to have a staggering NINE income tax brackets and an equally confusing and convoluted municipal income tax regime remains unaltered. An attempt to streamline and consolidate the state’s municipal tax system via House Bill 5 was unfortunately hijacked by special interests and watered down into little more than a weak gesture towards any real reform. 

On their own, Gov. Kasich’s income tax cuts would grow the Ohio economy – unfortunately, however, Gov. Kasich has also proposed a round of tax increases; including higher taxes on tobacco products, e-cigarette/vapor products, higher oil and gas severance tax, and a hike in the Commercial Activity Tax (CAT). 

The MBR proposal would see a 15-percent increase in the state CAT tax. Essentially, the CAT tax is a penalty on doing business in the state of Ohio measured by a business’s gross receipts. By 2017, the increase in the CAT tax would amount to a $743 million tax increase.

Ohio’s oil and gas industry does not escape Gov. Kasich’s tax increases either. The MBR proposes to increase the severance tax rate to 2.75-percent of a producer’s gross receipts – a primary pay-for for the proposed income tax cuts. One of the most startling components of the oil and gas tax increase, however, is the divergence of 20-percent of severance tax revenue to local governments in shale oil and gas producing regions. The state monies would be overseen by a new government bureaucracy called the Ohio Shale Gas Regional Commission (a nine member board appointed by the Governor). On the positive side, Gov. Kasich is pushing for the elimination of severance taxes on small convention gas producers – less than 910,000 cu.ft/quarter). All-in-all, the severance tax increase would amount to an $874 million tax hike by 2017. 

Another troubling component of Gov. Kasich’s MBR is the regressive tax hike placed on tobacco consumers. Over a two year period Ohio’s tax on cigarettes would increase from $1.25 to $1.85 a pack. This tax increase will be borne primarily by lower-income earners. Even more important, tobacco taxes have repeatedly proven to be a declining source of revenue and an inadequate pay-for for permanent income tax reductions.

Along the same lines of the proposed tobacco tax increase, Gov. Kasich has proposed an equivalent tax on e-cigarette and vapor products.  Currently, under Ohio law, these products are not taxed in the same manner as tobacco products. The fact is, e-cigarettes and vapor products are not equivalent to tobacco products and are often used as a means to quit harmful combustible tobacco products.

In total, the Governor’s MBR tax plan amounts to a $174 million tax cut for Ohioans over three years. Gov. Kasich should work with lawmakers in Columbus to craft a pro-growth tax reform measure, consolidating income tax brackets while reducing the tax burden and simplifying the mess that is the municipal income tax regime. Avoiding any “rob Peter to pay Paul” schemes would be key in this process. Yes, Ohio needs to continue its efforts to reform the tax code, but doing so on the backs of the oil and gas industry, Ohio businesses, tobacco consumers, and vapor product consumers is not the way to achieve this.

UPDATE: This post has been updated to reflect that Ohio’s Earned Income Tax Credit is non-refundable and therefore is a tax cut and not government spending. In total, the MBR amounts to a $174 million tax cut over three years.

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