Tax Reform

The passage of House Bill 66, Ohio’s 2006-07 biennial budget included significant tax reforms to help transform and revitalize Ohio’s economy. This budget is considered the most fiscally responsible budget passed by a General Assembly in more than 40 years. Spending growth is checked and personal income taxes have been cut and certain burdensome taxes on business are being eliminated. This measure allows for both individuals and business to keep more of their money and will encourage economic growth.

 The tax package cuts:

1. A 21 percent across the board cut of the personal income tax, the largest income tax cut in Ohio’s history. The cut is being phased in over 5 years, 4.2 percent per year; calendar year 2006 is the second year of the reduction.
2. State sales tax rate reduced from 6 percent to 5.5 percent.
3. Four year phase out of the tangible personal property taxes (TPP) on business and industry. Eliminates all the components of the TPP, machinery and equipment, furniture and fixtures and inventories. A 100% exemption of the TPP for new machinery and equipment for purchases after December 31, 2004.
4. Repeal of the Corporate Franchise Tax over five years.

Other tax changes:

1.     Creates a new broad based low rate tax to partially replace the TPP and corporate franchise taxes. The Commercial Activities Tax (CAT) is more equitable tax; the rate is .0026 of gross receipts over one million dollars sourced in Ohio only, phased in over five years. From $150,000 to $1 million the tax is a flat rate of $150.00.

2.  Repeals the real property tax 10 percent rollback on Class II properties, commercial and industrial only

3. Certain consumption taxes are increased. i. e. tobacco.

These changes are necessary to make Ohio more competitive in the global market. For example, when you combine state and local income taxes depending on your income and location it is possible for your combined state and local tax liabilities to be in excess of 10 percent. To put that into perspective all our neighboring states of a flat rate between 3 to 5 percent, seven states do not have a state income tax at all. The impact on especially small and medium size business is tremendous. Most businesses of this size are not C-corporations but rather sole proprietors, partnerships, limited liability corporations or S-Corporations, which all are “pass through” entities and are required to pay the high income tax rates on their personal tax return. Therefore, without the tax changes they have less capital to reinvest and grow their businesses and create jobs.

The TPP tax on business is especially burdensome and places Ohio’s business sector at a huge disadvantage to compete in today’s global economy. Businesses need to invest in new machinery and equipment to increase their productivity and improves their competitiveness. Under Ohio’s TPP tax we essentially punish them for investing in their business, because we tax that new piece of equipment. This tax package has taken away the disincentive to invest in Ohio and create jobs.

Unlike the Federal government, Ohio’s Constitution requires a balance budget and cannot borrow funds to balance the budget. Therefore, the only way to balance the budget is either cut spending or raise taxes or a combination of both. In the recent past Ohio’s economy suffered from the normal downturn in the business cycle and the impacts from 9/11 and the overall war on terrorism. On the spending side most of state government has experienced spending cuts, with the exception of Medicaid and K-12 education, the two largest budget expenditures.

In House Bill 66 a combination consisting of  fiscal restraint, cutting certain taxes to enhance Ohio’s business climate and partially replacing revenue with a tax structure that phases in a more fair system and positions Ohio to be more competitive. The Commercial Activities Tax (CAT), broadens the tax base, includes more taxpayers both in Ohio and out of state businesses doing business in Ohio. The low rate provides for businesses to pay for services and keep more of their earnings. An important point to remember the CAT is partially replacing two taxes the franchise and TTP taxes that were not determined by net income. Therefore, if a business in the past had a net loss they were still liable for the two taxes that are being eliminated. When comparing between the old structure and the new tax structure and with no changes in the economy, the tax changes are a tax cut of at least $2 billion. Obviously, there will be some businesses that might pay more taxes under the new system. Those types of businesses will generally be in the service and retail sectors. The positive aspect for them are two-fold, a stronger economy will provide more opportunity and the service and retail sector can adjust to the added cost easier since the costs are comparable with their competitors and the added costs are minimal, unlike other sectors who are competing head on with global competition.

In conclusion, enacted of this tax package is helping to transform and revitalize Ohio’s economy. Site Selection magazine ranked Ohio first in the Midwest and second in the nation for new and expanded business facilities. In 2005, Ohio attracted 598 projects that had investments of at least $1 million, created at least 50 jobs or added at least 20,000 square feet of space to existing businesses. Ohio also claimed two of the top 10 metropolitan areas with the most new operations and expansions. Cincinnati and Cleveland ranked sixth and eighth respectively. At least four companies have cited the tax changes as reasons for expanding their operations in Ohio. Century Mold Company reversed their plans to locate in Indiana and instead chose to base 75 new jobs in Monroe, Ohio. Klosterman Bakery Company chose Springboro over a site in Kentucky to locate 45 new jobs after Ohio pitched the new business tax plan. Amylin Pharmaceuticals and Mountaineer Metals also plan to expand in response to new, more business friendly tax code. These companies are also adding new jobs. 

Economic growth leads to more jobs and provides resources for education, infrastructure and other vital public services making Ohio a better place to live and raise a family.