With Income Tax Revenue Coming In Below Estimates, Lawmakers Look Hard At Tax Cut In New Budget

Apr 10, 2017

Gov. John Kasich has cut income taxes in all three of his state budgets, and has proposed a 17% income tax cut in his final one. But state lawmakers are working on the new state budget right now, and are looking at state tax revenue coming in below estimates. And even Kasich’s Republican colleagues in the legislature are showing signs that they’re concerned about what they’re seeing.

The state says its March tax collections came in $203 million dollars below estimates. That brings the total shortfall for this fiscal year to $615 million – more than half a billion dollars. And it’s led by income tax revenues that are $448 million dollars less than had been projected.  Budget director Tim Keen admits those numbers are a surprise, but says there are a few things that could be to blame – including the withholding growth rate, which he calls shockingly low. “Our withholding out of people’s weekly or biweekly paychecks is much lower than we expected, which is driving a good portion of the underage,” Keen said. “We are also having a filing season where refunds are much larger than we expected.”

March’s report shows income tax revenue is behind by $95 million. Income tax collections have been off eight of the last nine months. The Office of Budget and Management has said in its monthly reports that the shortfalls are the result of changing taxpayer behavior because of income tax cuts. 

Democrats have long blasted what they call tax shifting – cutting income taxes while increasing sales and other consumption taxes. This proposed budget includes a 17% income tax cut, paid for with a half a percent boost in the state sales tax – which is a 9% increase. That tax would also be broadened to more things, and the budget also hikes taxes on cigarettes, e-cigarettes, alcohol and oil and natural gas drilling (though Republican leaders have said that fracking tax hike is a non-starter). Keen testified last week before the Senate Finance Committee, and got this question from Sen. Vernon Sykes (D-Akron). “Now that it seems that our economy is lagging more than the projections and more than the national average, would you say – are you saying maybe the reason is that we haven’t cut taxes enough? What is the rationale?” Sykes said. “Or do you accept the responsibility that what you have done in the past just has not worked?”

Keen responded by saying that tax cuts have increased the state’s competitiveness. And he also said slow population growth has hurt revenues, but that lowering the income tax can help with that.

But other lawmakers are also now raising questions – and not just Democrats. “Why is the governor insisting on continuing with tax cuts at this point, rather than giving it a little more time?” asked Sen. Peggy Lehner (R-Kettering). She suggested a suspension of the tax cut idea for the first year of the two-year budget cycle. “At least maybe holding off for a year to the second half where we could make some adjustments. It seems to me, when things aren’t working out the way you expect them to, you sit back and take a breather.”

Keen said Kasich has slowed down toward his mission of moving the state away from income taxes and toward sales and consumption taxes – doing a $20 million dollar income tax cut instead of a bigger one. “The governor has adjusted his tax proposal that is in this budget as a result of the economic and revenue circumstances that we face in this budget. The net tax reduction that is proposed is significantly smaller than we have seen in past proposals from the governor,” said Keen.

The House is set to put out its version of Kasich’s budget by the end of the month. The Senate won’t get to the budget till May. It needs to be agreed to by both chambers and signed by the governor by the end of June.