Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial service and business advisory podcast that challenges your old school business practices and the traditional business suit culture. Our guest are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
There’s certainly a lot of rhetoric being thrown around these days, especially with regard to current legislative issues. Today’s guest will help us cut through the jargon to tell us what business owners can expect to face from the state as well as the federal government in the coming months.
Greg Saul, Director of Tax Policy with the Ohio Society of CPAs is here to discuss these legislative concerns the business community will be grappling with over the next few months and what the Ohio Society is doing to be an advocate for Ohio’s business community. This is surely to be a great episode and I can’t wait to get this thing going. Lot of information. So, without further ado, welcome to unsuitable, Greg.
Greg Saul: Thanks for having me. If I would have known that was your intro, I probably wouldn’t have wore a suit, though, because it didn’t really go that well with this.
Dave: If you want to take your tie off, go ahead. We had a guy take his shirt off earlier. We had to cut that out of the episode. Greg, I wanted to talk a little bit. You and I talked off air yesterday about the power of the Ohio Society. Of course, as a disclaimer, and I don’t mean this in any negative way, I’m a member, dues paying member of the Ohio Society, been for a long time, very proud of that organization.
But the Ohio Society of CPAs can be a tremendous resource for businesses within the state of Ohio. Lot of times, we have clients and us even as individuals complain about a tax policy here, a policy there. We’re not sure what to do about it. We can write our congressman, senator. But we also forget about we can contact the Ohio Society, we can contact our CPAs. We can contact you and you guys will go to work for the business owner, because I’ve heard you say on many speaking engagement that the Ohio Society is here to benefit the businesses within the state of Ohio.
Greg: We have several committees that members can volunteer on, especially legislation-wise. We have a state and local tax committee. But more importantly, on everyday issues that come up too, I always get calls. Depending on the volume of calls that I get in from the office lets me know what’s going on out there.
I see our members as at the grassroots level and you guys are our eyes and ears. If something needs to be done at the legislative level or with the Department of Taxation, if they’re auditing on a particular issue, I know that’s come up in the small business deduction and the business income deduction realm. We’ve been able to act pretty quickly on that as well. But I always encourage members to call in, or if you see me at an event, also come up to me afterwards and tell me what’s going on out there so we can act on it quickly.
Dave: I forget the Ohio Society of CPAs is actually a leader of all the associations across the United States with the American Institute of CPAs, and even Washington D.C. knows the Ohio Society.
Greg: Yeah. As a state, we’re pretty lucky because we have Congressman Tiberi and Congressman Renacci are currently on the Ways and Means Committee. Senator Portman and Senator Brown are both on the Finance Committee in the Senate. So, those are the two committees that hear a majority of the tax legislation in the House and the Senate. So, it’s good having them as a resource.
Here at the state level, we do stay more so involved because we’re a state society. But we have myself and Barb on staff as lobbyists and we also have contract lobbyists. Some state societies are not as involved with staffers actually being lobbyists. So, some states just have contract lobbyists, some of the state societies.
So, especially here in Ohio, it’s good because we actually work for the association for the Society. So, our interests are only for the Society. Sometimes when you hear the negatives of lobbying, contract lobbyists have several clients sometimes. But Barb and I are just solely lobbying for CPA interests, accounting interests in Ohio.
Dave: Fantastic. On earlier episodes of Unsuitable, we’ve had information regarding changes, upcoming changes under the Trump administration to the federal tax code. Today, I think we’re going to focus more on the state of Ohio code. We may touch briefly on federal, but I think the state, there’s a lot going on in the state that I think we need to share with our listeners who are primarily business owners within the state of Ohio or the surrounding states that do business in Ohio.
One of the facts, and I don’t know if this is completely true or the number is accurate, but tax collections in Ohio, or the revenue budget, is behind by about 850 million behind the estimate. Does that sound about correct, with most of that being from the tax side?
Greg: Yeah. So, most of it is from the income tax, revenues not coming in according to projections. That’s the take from the taxes. The state has said that they’re probably going to end this fiscal year in the black. Ohio’s fiscal years are July 1 to June 30th. So, we’re about a few weeks away from the end of fiscal year 2017. Fiscal year 2018 will start July 1. That’s why we’re actually working on the two year budget right now. They have to have that in place and signed by the governor by the end of June, June 30th.
So, the reason why the state still thinks that they’re going to end in the black even though the tax revenues are down is because they had projected having to spend more on Medicaid and some other areas. They didn’t have to spend that much, especially in the Medicaid area. So, they think they’re going to end it in the black, but this is the trend on where they’re looking at, what it’s going to be like for the next two years.
So, what they’re taking a look at is they think they’re going to have to cut about 800 million in spending. That’s what they came out with a couple months ago. I think that’s still around 800 million to about a billion dollars. So, where is that going to come from? That’s what’s being discussed right now.
Dave: Great. We’ll jump into that. Another area that you shared with our firm is over 50% of Ohio’s budget funds are spent on healthcare. Does that still hold true?
Greg: Yeah. In the context of the two year budget, because Ohio does a separate transportation budget and a separate worker’s comp budget, so when you throw that in there, it probably wouldn’t be half. But in the context of the budget that they’re doing right now, it is Medicaid, is that they always say the three things: medicate, educate, and incarcerate. So, those are the three areas where Ohio, for good or bad, has to spend most of the money that is in this budget.
Dave: And revenues are down.
Greg: Yeah. Also, everything that’s going on at the state level has to operate in the context of what the feds are doing. So, with the Medicaid expansion that Ohio did a couple years ago, they were being reimbursed by the federal government a hundred percent. Then for 2017, we’re on the hook for 5% of that. Then starting in 2020, it’ll be 10%. So, Ohio’s going to have to come up with more a general revenue fund for that.
If that’s kept, if the federal government ends, depending on what they do with the repeal and replace, we could be on the hook for all of the, it was about 700,000 extra Ohioans that came on the Medicaid rules because of the expansion. So, if they end that program, the expansion reimbursing at the federal level, Ohio may be on the hook for all 700,000 of those that we expanded it to.
Dave: So, the state biannual budget, and you referred to that has to be completed by the end of June, which by the time this podcast airs, it’ll probably be in place, will have to be in place by statute. But that’s the current main legislative priority and impacts all industries in Ohio. Obviously, we’re in the first part of June. Do you expect that to pass shortly?
Greg: Yeah. Right now, as I’m talking here today, it’s in the Senate and the sub bill is coming out next week. So, there’ll be several changes to it. After that, it gets voted off the Senate floor. The last week of June will be a conference committee where the House and the Senate work out the differences between the bill.
Then once the conference committee report comes out, there cannot be anymore changes to it at that point. Goes to the House floor or the Senate, just an up or down vote. Like we said, it has to be voted out, so it’s going to pass. Then the governor in budgets has line item veto authority because they have appropriations.
Normally, he just vetoes a bill or doesn’t veto a bill. But in the budget bill, he can literally go through line by line and just veto language that he doesn’t want in the bill. Then he’ll sing it. Then it’ll be in effect, like I said, by midnight on June 30th. July 1st is the beginning of the new fiscal year. There’s actually an old Senate finance director that has a party on June 30th, Rockin’ Fiscal Eve. The location of it changes, but it’s a big deal.
Dave: Do you go to that?
Greg: I have gone to it. So, maybe I can invite you guys this year too. So, yeah.
Dave: Sure. It’d be great. Where?
Greg: It’s usually a pretty good time. The location changes, but the last couple years, it’s been at Miller’s Ale House down in the Grandview area.
Dave: Sure. Sure. But as we started out, the revenues are down, let’s say 850 million. You referred to there may be some tax cuts between 800 million and a billion bucks in this budget anticipated to balance the-
Greg: I think more so, they’re trying to cut spending so they’re having tax increases. There was some proposals in the first part of the budget the governor had, and over the years has been trying to cut the income tax, but was expanding the sales tax base and rate. There was going to be a small increase in the sales tax.
We had fought this the last couple budgets. The sales tax to professional services four years ago, it was specifically on professional services and then it was management consulting services with a definition that included a lot of what CPAs and attorneys and a lot of professionals do. So, this time it was a little more limited. But most of that stuff is out of the budget at this point.
We can get into this maybe a little bit later, but the municipal tax proposal’s in there, a continuation of what we had done a few years ago with House Bill 5. But I think the majority of where they’re going to get the money is mostly from cutting spending instead of trying to institute any kind of tax increase. But also, that means that there’s probably not going to be much room for tax decreases this time.
Dave: Right. Okay. In your opinion, with the spending cuts, are they any industries that you feel that might be hit harder than else? You’d mentioned education. Could that be something to look at?
Greg: I think that they were trying to at least keep education flat funded, maybe slight increases in some areas. I think healthcare is always an industry that they’re looking at, especially because its tied to so much of the Medicaid budget. Like we had said, that’s about half of the budget spending. That could be somewhere where they take a look too.
State agency cuts, the agencies actually request money to operate. They’re trying to pare back on the spending. A lot of what the state, I think, has been doing too is attrition rates. When people are retiring now, there’s not as many jobs that they’re hiring those positions for. So, they do see some savings from that as well.
Dave: Right. You’d mentioned earlier about the municipal tax. That’s one area where we get a lot of feedback from our clients, especially when we send them an invoice for their year end tax services and we’re filing in 15 municipalities and pay $10 of tax, or an example like that. The Ohio Society went to bat and was instrumental in getting some uniformity, not complete, but some uniformity in municipal tax.
Greg: Yeah. In House Bill 5, the 20 day rule applied to withholding only, not net profits. Now this time around in the budget, the focus is more on the business net profit side with the centralized collection administration proposal that’s in there. So, with the 20 day rule, and I still do get calls about it, because at the end of the day, the state language, the code is standardized. But the cities are still implementing it. So, I do think there is still some confusion out there on how it’s being implemented by some of the cities.
But the old one was 12 days. Then we went to 20 days. The federal Mobile Workforce Act is out there. They have a 30 day standard. That would have been a big jump from 12 to 30, so the reason why the state compromised on 20 was because there’s four weeks in a month and five workdays, typically, in a week. So, four times five is 20. So, that’s where the 20 day rule came from. It’s not retroactive back to day one anymore.
So, that helps with employee withholding because the withholding tracks the employee. The net profit side follows the business. So, that 20 day rule really didn’t cut down on the amount of net profit filings businesses had to do. That stat is out there is about 15%, depending on the city, but about 15% of their income tax revenue comes in from net profits. So, that’s really the side that we’re taking a look at with this centralized collection proposal.
Dave: Refer that 20 day rule, just for our listeners, that means if I’m in a municipality or working in there 20 days or less, I get a little bit of a tax break compared to what it was in the past?
Greg: Yeah. So, you would start paying into the non-resident city where the business would hit on day 21. But you’re still paying tax.
Dave: It’s a little easier compliance.
Greg: Yeah, it’s more for, yeah, the compliance. So, 20 days in a month. So, theoretically, the most that you should have to file on behalf of employee would be 12 because there’s 12 months in a year. So, it should cut down on the amount of filing.
Dave: In your opinion, is there more municipal tax reform to be done?
Greg: I think that when you look at it, there’s a lot of things out there, whether it’s going to get accomplished through the legislature or maybe someday in a ballot initiative. But you always hear about the credit reciprocity. A lot of the cities, if they were at a hundred percent granular credit, now they’re moving off of that so that you have to pay where you live and, depending on the rates. It really does depend on that.
But that’s something that could be down on the road. But I don’t necessarily see that happening legislatively anytime soon. But the net profits was part of it. Then the elimination of the municipal throwback rule is also currently in the budget. But like I said, this stuff could change the next couple weeks here, but that’s where we’re at.
Dave: The commercial activity tax, or the CAT tax, you sense any changes forthcoming in that area?
Greg: Not in this budget. The last two budgets, there were proposed increases. It’s currently at .26. Then there was .32 and .30 were a couple proposals that had been out there in the past. But it was remaining at .26. The Society is actually part of a coalition of business groups that try to keep the credits and exemptions to the CAT limited in order to keep the rate low, nor do we want to bifurcate the rate like some of the other state taxes bifurcates the rate. Washington has 35 to 40 different industry groups.
With the one rate that applies to everybody in Ohio, that’s how it’s been since 2005 when it became enacted and that’s where we’d like to keep it. The credits and the exemptions, we just don’t want it to become like the corporate franchise tax and the tangible personal property tax because that’s what it replaced. Those, over the years, became like Swiss cheese. There were so many exemptions to them. So, where the CAT’s currently at, we would like to keep the rate there and limit those exemptions and credits to it.
Dave: A lot of the feedback that we’re hearing, receiving from our clients is, I think there’s a general feeling that the federal tax, their federal tax will go down, but the state tax, all in, will increase. Is that a fair assessment, all in? When I say all in, the CAT tax, the deductions, the state tax, the sales tax.
Greg: Yeah. I think that, and the Tax Foundation comes out with these kind of studies where they look at, you can’t just look at the state rate, even on the sales taxes, the counties have a piggyback, the property tax, and the income tax, the municipal income taxes, depending on where, if they have credit or not. There’s an examples out there where some people are paying nine to 10% once the income tax is on top of that.
So, I think the federal, what happens at that level, it’ll impact each state differently. So, we’ll have to take a look at it, depending on what they end up doing on that. But the rates, cutting the corporate rate, you see 20% was in the House proposal, a better way that Congress came out with, and then 25% for past remedies. When Trump came out with his version, it was 15% for all of those.
So, how that’s going to get done, I think is if they do it in the Senate, it has to be revenue neutral if it’s just a simple majority. If they want to get 60 votes, it doesn’t have to be revenue neutral. But it’s going to be harder. I think once the healthcare debate maybe calms down a little bit, then I know the House has picked it up. But the Senate hasn’t been moving too quickly on the healthcare stuff.
I would like to see tax reform in 2017. But the farther we get into the year and closer to 2018 when it’s an election year, it’s probably less likely. The big reform is less likely. They might get something with the rates. But it’s not going to be like what was mentioned even a couple months ago.
Dave: Is the business income deduction at the personal level safe for 2017 in your opinion?
Greg: I think we’ll-
Dave: We’ll find out.
Greg: Yeah, we’ll find out the next two to three weeks. I think there is discussions, especially since the income tax revenues are down so low. I think that that’s something that they’re definitely taking a look at. Are they going to change the percentages back down to 75%, that could be something, or the new 3% flat rate? Are they going to take that back? I don’t necessarily see that, maybe.
But they might define further the eligibility of who’s eligible for it and you maybe pare it down on that side. I think that there is a pretty strong chance that that is not going to be status quo, though. It was compacted two years ago. I don’t think it’ll be anything too substantial. I do think that that’s a policy that the state wants to keep, the legislature wants to keep because they had just enacted it two years ago. I think it’s a little too early to tell in that timeframe on whether it’s working how they had intended or not.
Dave: Right. I hear you speak at several of the events sponsored by the Ohio Society of CPAs and you always talk about the business climate in Ohio, and primarily from the tax side. For our listeners, where in your opinion does Ohio stand or rank as far as a competitive feature with other states for doing business, and are we getting better? Two sided question.
Greg: Yeah. It depends on, I think, the variables that go into these studies. You see site selectors and they always have us in the top five. The Tax Foundation I had just mentioned, I had seen their study. They have us ranked in the bottom 10 of states and it’s because they don’t like gross receipts taxes and we have a CAT tax and we have nine income tax brackets currently. I know this budget proposal pares it down to seven. So, we’re trying to get rid of … But they like the flatter taxes in the states. So, that’s how they rank them.
So, it depends on where you look. I think Ohio’s doing better. The governor, when he first came in, instituted JobsOhio. They are taking a more private sector approach to trying to get through incentives and economic development jobs into the state. But I don’t think any politician that you hear out there on the stump would say that you ever hit a satisfactory point unless unemployment hits 0%. So, I do think that they’re trying to institute policies in Ohio that are beneficial.
But like I said, we do lag the nation in jobs added. That might not necessarily just be because of the policies, but the warmer states, people like to go down to Florida and Texas and that kind of stuff too. So, there’s a lot of factors that go into where somebody wants to live.
Dave: We’ll recap our discussion today. Number one, as business owners, we need to pay attention to the state budget that’s going to be upon us shortly, look at the Ohio Society as a resource. A lot of committees, if our clients have issues, they need to contact us, they need to contact you. The Ohio Society is a great resource and advocate for businesses within Ohio.
Our guest today has been Greg Saul from the Ohio Society. He’s the Director of Tax Policy. Thanks again for joining us on unsuitable today. Sometimes it feels like our statewide issues are greatly overshadowed by what’s going on at the federal level, and it’s nice to drill into these issues we are facing in our home state. Greg’s done a nice job of that for us.
Listeners, if you’d like to learn more about these issues, let us know. Email us at podcast@reacpa.com and tell us what legislative issues are most concerning to you and your business. You can also join the conversation on social media with the hashtag, #ReaRadio. As always, don’t forget to subscribe to unsuitable on iTunes. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.