Ohio Reduces Its Income Tax and Commercial Activity Tax

On July 4, 2023, Governor Mike DeWine signed the Ohio Biennial Budget Bill (House Bill 33) into law. Included in the Budget Bill are dramatic changes to the Ohio personal income tax and commercial activity tax.

Personal Income Tax

Since 2004, Ohio has been steadily reducing its personal income tax rates and reducing the number of tax brackets. Back then, there were nine tax brackets, and the highest marginal rate was 7.50%.

Under the Budget Bill, in 2023, there will be only three tax brackets and the highest rate will be 3.75% (for non-business income over $115,300). Once fully phased-in, in 2024, there will be two tax brackets and the highest rate will be 3.50% (for non-business income over $100,000).

Business income will still be taxed at 3.00% for amounts over $125,000 (filing single) or $250,000 (filing jointly).

Taxpayers earning $26,050 or less will be exempt from paying any Ohio income taxes.

Commercial Activity Tax (CAT)

The Budget Bill makes significant changes to the CAT, including eliminating it for many businesses. In 2024, all taxable gross receipts of $3 million (or less) will be exempt from tax. Starting in 2025, this exclusion will increase to $6 million. The new CAT exclusion is a substantial change from the current exclusion of $150,000.

As a result, the CAT paid by all taxpayers will be reduced. Further, it is estimated that 90% of businesses that currently pay the CAT will have no future CAT liability. Interestingly, however, many of those businesses will still have to file CAT returns. For all required filers, tax returns will need to be filed quarterly – instead of annually for some taxpayers.

The tax rate remains the same at 0.26%.

Other Notes

· Sales Tax Holiday: The tax holiday returns in August 2024 for a potentially longer period and more tax savings. It will apply to all tangible personal property of $500, except for motor vehicles, alcohol, tobacco, and some other items.

· Sales Tax on Baby Items: Starting October 1, 2023, sales tax exempt items will include baby diapers, wipes, car seats, cribs, and strollers.

· Sports Gaming Tax: The tax imposed on sports gaming proprietors increased from 10% to 20%.

· Tax on Minors: Starting in 2024, the Budget Bill exempts workers under the age of 18 from Ohio municipal income tax.

If you have any questions or would like to discuss the information provided in this Client Alert in more detail, please do not hesitate to contact me.

Harlan Louis, hlouis@baileycav.com and (614) 229-3225

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