Ohio Public Law Update; Ohio Budget Bill Brings Many Changes

    View Authors July 2005
    The State of Ohio's biennial budget bill, Amended Substitute House Bill 66 (the Bill), which was signed by the Governor on June 30, 2005, among other things, restructures certain taxing programs in the State, amends tax increment financing programs and amends the State school foundation formula relating to certain tax abatement and tax increment financing programs.

    State Taxes. The State corporate franchise tax is being phased out over five years except for its continuing application to financial institutions and certain affiliates of insurance companies and financial institutions. A new commercial activities tax (CAT) on gross receipts from doing business in Ohio is phased in over the same five-year period. State personal income tax rates are reduced 21 percent over five years. The State sales tax rate is decreased from 6.0 percent to 5.5 percent, and the State excise tax on cigarettes is increased from $0.55 to $1.25 per pack.

    Tangible Personal Property (TPP) Tax. The TPP tax will be phased out from 2006 through 2008, with the tax generally eliminated, including with respect to inventory, as of January 1, 2009. Most new manufacturing machinery and equipment first taxable in 2006 or thereafter is not subject to the TPP tax; new furniture and fixtures and inventory will be subject to the TPP tax during the phase-out period. The State will make compensating distributions to school districts and other local taxing units from revenue generated by the newly enacted CAT. These compensating payments will be based on the value of taxable tangible personal property reported for 2004 in the school district or local taxing unit and the property tax levies in effect for 2005 (as long as the levy was approved by the voters before September 1, 2005). The State will make full reimbursement at these base levels through 2010, with gradual reductions in the reimbursement amount from 2011 through 2018 for school districts and from 2011 through 2017 for other local taxing units.

    Real Property Tax Rollback Payments. Effective for tax year 2005, the Bill terminates the 10-percent real property tax rollback and related State rollback payments for commercial and industrial real property used in business (except for farming or certain housing uses); the rollback and State rollback payments remain in effect for other real property.

    Local Government Fund. The Bill did not make cuts in the Local Government Fund.

    Joint Municipal and School District Income Tax. Effective immediately, the Bill authorizes municipal corporations to propose ballot issues to levy income taxes to be shared with school districts but prohibits the tax from being levied on the income of nonresidents.

    Tax Increment Financing

    Incentive Districts. The sunset date of June 30, 2007 for TIF Incentive Districts is eliminated. Effective January 1, 2006, and unless one of several transition rules apply, cities, counties and townships establishing Incentive Districts after January 1, 2006 must comply with new notice and approval requirements (by counties if implemented by a city or township, or by townships if implemented by a county) if the TIF exemption exceeds 75 percent or 10 years. The exemption may be up to 100 percent and for up to 30 years without county or township approval if certain compensation payments are made to that county or township. In addition, the legislation establishing an Incentive District must identify a development project that will place additional demand on the identified public infrastructure improvements. For cities, counties or townships with a population that exceeds 25,000, the aggregate value subject to TIF exemption in all Incentive Districts cannot exceed 25 percent of the taxable value in that city, county or township.

    For Incentive District TIFs approved on or after January 1, 2006, certain tax levies approved after the date the local TIF legislation is passed cannot be exempted by that TIF and are to be collected with respect to parcels in the Incentive District. These include, among others, levies for mental retardation and developmental disabilities, children's services and libraries.

    Finally, unless one of many transition rules applies, the State school foundation formula payments made to school districts could be reduced if compensation is made to a school district under an agreement with a governmental entity. No adverse impact under the school formula occurs with respect to certain parcels in the Incentive District if (i) the TIF Ordinance is adopted prior to January 1, 2006, (ii) it identifies a private project on those parcels and (iii) an agreement is entered into with a developer for those parcels. There are other "targeted" transition rules applicable to specific circumstances.

    Other Tax Increment Financing Matters. The definition of Public Infrastructure Improvement in Revised Code Section 5709.40 has been amended to exclude police or fire equipment. Cities, counties and townships may determine which year a TIF exemption begins under Revised Code Sections 5709.40, 5709.73 and 5709.77 (and for Section 5709.41 if it can meet the requirements of the transition rule in 2005), and the incremental demand test in those programs has been removed.

    Effective Date. Generally, the amendments to the tax increment financing programs (not including the school formula provisions) take effect January 1, 2006, subject to certain transition rules. A TIF ordinance or resolution enacted on or after July 1, 2005 and on or before December 31, 2005 (for Revised Code Sections 5709.40, 5709.41, 5709.73 or 5709.78) may specify the year the exemption commences. Further, Section 557.17 of the Bill provides that the amendments to Revised Code Sections 5709.40, 5709.73, 5709.77 and 5709.78 do not apply (and the law in effect prior to January 1, 2006 applies) to any project if the project meets either of the following requirements: (a) a "project agreement" has been "completed" for the project on or before December 31, 2005 or (b) "bonds" have been issued for the "project" on or before December 31, 2005.

    Other School Foundation Formula Matters. Commencing with State school foundation aid payments for fiscal year 2007, the value of real property for which an exemption from taxation is granted on or after January 1, 2006 under Revised Code Chapter 725 (urban renewal tax increment financing) or 1728 (urban renewal), Section 5709.84 (railroads) or 5709.88 (remediation) or under the Enterprise Zone or Community Reinvestment Area programs is treated as if it were taxable for purposes of the State school aid formula, less a certain portion thereof that is subtracted from that value based on and relating to "payments and other compensation" received in the preceding year by the school district pursuant to any agreements between the school district and the political subdivision that acted under authority of that exemption program. The greater the "payments and other compensation" received by a school district under such agreements, the higher the percentage of the exempted property value is treated as taxable under the formula. If there are no such "payments and other compensation," the exempted property value is not treated as taxable under the formula.