Senate Bill 18 Income Tax Issues

By Mike Sobul posted 14 days ago


Senate Bill 18, which has passed the Senate and been reported by the House Finance Committee, is what’s known as a conformity bill. When Congress amends federal tax laws, as it did recently with the passage of ESSR 3 (The American Recovery Program), state tax laws cannot automatically conform to the changes. Only the Ohio General Assembly can change Ohio tax laws. This is generally accomplished through a conformity bill.

Senate Bill 18 makes changes to taxability of the Earned Income Tax Credit, unemployment compensation benefits, some specified deductions for small business, and extends a charitable contributions deduction for individual federal non-itemizers. The Earned Income Credit change will impact state revenues but will have no local impact because that credit does carry forward to the school district income tax (SDIT).

The unemployment compensation taxability change could have a noticeable impact on some school districts levying traditional income taxes (this income is not taxable in districts using the earned income base). Generally, districts that have seen bigger drops in withholding revenue are likely to have more negative impact from the exclusion. Based on preliminary data reported to the Legislative Budget Office (LBO) by the Ohio Department of Jobs and Family Services, LBO estimates that the exclusion could reduce taxable income statewide by between $3.5 and $6.1 billion for tax year 2020. This could be as much as one percent to 1.5 percent of taxable income. These numbers are preliminary and subject to change. This percentage could vary from district-to-district dependent upon income make-up and level of unemployment. The federal law change is supposed to only be for one year, tax year 2020.

There are several provisions impacting small business income. Since small business income is fully taxed under SDIT (no $250,000 exclusion), there can be impact on all districts with income taxes. Magnitude of the impact is hard to gauge but should not cause any major disruptions. In aggregate, business income is only three percent of the tax base for traditional districts and four percent for earned income districts. The overall impact of the changes in the bill is likely to be a fraction of 1% of total income.

The charitable contribution deduction would impact tax base for traditional districts, but the revenue impact will be minimal. For each married filing joint tax return taking the maximum deduction, a district with a one percent tax would lose $6. It would lose $3 for each single filer claiming the maximum deduction. These federal law changes would not impact districts with earned income taxes.

Outside of SB 18, there have been questions about the pushing back of the April 15 federal filing deadline to May 15 under certain conditions. The one-month extension of the filing deadline should have virtually no impact on school district revenues. All revenues collected by the state between April 1 and June 30 are paid to districts at the end of July. Since both filing dates are within this timeframe, the change is generally irrelevant. The only potential impact would be due to individuals who had been planning to file in late March postponing that to May because of the change. That would move money from the April distribution to the July distribution. Such taxpayer behavior will likely be rare.

Mike Sobul is Senior Analytics Advisor at Forecast5 Analytics, and a retired treasurer/CFO.

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