The Dayton Daily News

Ohio house speaker Jon Husted was on the money when he identified tax reform as vital to the state’s future. The “time is now,” he recently told the Dayton Daily News editorial board. …

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Gross receipts concept would shift the burden

The Toledo Blade

COLUMBUS – Republican legislators and Gov. Bob Taft are examining a proposal to create a new business tax that supporters say would let Ohio eliminate the corporate franchise and tangible personal property taxes.

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The state’s unemployment rate fell 0.6% in December, but state officials said the decrease is best attributed to the volatility of data used to calculate the rate rather than improvements in Ohio’s economy.

The reduction to 5.9% came as non-farm wage and salary employment declined by 7,500 between November and December.

“Fluctuations in the unemployment rate over the past few months are primarily due to the volatility of Current Population Survey data that are used in the rate calculation, and not the result of significant changes in the state’s economy,” said Ohio Department of Job & Family Services Director Barbara Riley. “The December unemployment rate of 5.9% appears to better reflect the current economy that rates from the previous two months.”

DJFS said the number of workers unemployed in the state in December was 347,000, down from 380,000 in November. It said the number of unemployed Ohioans has decreased by about 19,000 over the previous 12 months.

Policy Matters Ohio pointed out that the department’s figures show that the state didn’t experience a net gain of jobs in 2004 and noted that current employment levels are lower than they have been since the 1990′s.

On a county-by-county basis, unemployment rates ranged from 2.8% in Holmes County to 18.4% in Morgan County. Ten other counties – Monroe, Meigs, Adams, Vinton, Perry, Huron, Coshocton, Pike, Ottawa and Hocking – had rates at or above 9%. Eight other counties – Delaware, Auglaize, Mercer, Shelby, Van Wert, Butler, Hancock and Warren -reported rates at or below 4%.

A new study sponsored by a U.S. government agency that monitors U.S.-Chinese relations quantifies the job losses that have occurred in Ohio and the rest of the nation due to rising trade deficits with China. The study’s author, Dr. Robert E. Scott, an economist at the Economic Policy Institute in Washington, D.C., uses an economic model that takes into account the net employment effects of imports and exports on 184 sectors of the U.S. economy. Net employment effects include potential job gains (“job opportunities”) that would have occurred in the U.S. but did not materialize because growing U.S. demand was met by production in China. Over the five years from 1997 to 2001, Ohio lost over 21,000 job opportunities due to trade with China. After China’s entry into the WTO in 2001, Ohio lost an additional 21,000 job opportunities just in the two years from 2002 to 2003. Ohio is one of eight states to lose over 20,000 job opportunities due to imports in the latter two-year period. The study also warns that further job losses are likely given that Chinese production is shifting to more technology-intensive sectors.

Added penny sales tax likely to be extended

Dayton Daily News

Gov. Bob Taft and Republican legislative leaders have a publicly silent, but
influential, partner in their campaign to overhaul the state’s tax code to boost Ohio’s economy.

The Ohio Business Roundtable, an independent, nonpartisan group made up of chief executive
officers from about 80 major corporations, has been working with Taft and lawmakers on
proposals to make the state’s tax climate a “distinct public asset” in Ohio’s economic growth and standard of living, said
Richard Stoff, roundtable president.

Stoff declined to release details of the group’s proposals. But several people who have been briefed said the ideas
include:

Enacting a gross receipts tax on business transactions in Ohio a tax with a broad base, a very low rate or rates and a
cap on what would have to be paid.

Eliminating Ohio’s corporate franchise tax the main state business tax and the tangible personal property tax,
which businesses pay on machinery, equipment and inventories with the proceeds going to counties, municipalities,
townships and school districts.

Reducing Ohio’s personal income tax rates by about 20 percent, with provisions to exempt some low-income Ohioans
from paying the tax.

Broadening the base of the state sales tax to include more services, possibly including legal and accounting services.

Keeping all or part of the 1 percentage point increase in the state sales tax. The increase is set to expire June 30.
Increasing the cigarette tax from 55 cents a pack to as much as $1.

Increasing taxes on alcoholic beverages.

Enacting targeted business tax incentives.

Asked about the proposals, Stoff said they represented the “basic gist” of the group’s plan. He said, however, the
business group also wants to link its tax-reform proposal to responsible state spending practices.

“Our guiding principle is to provide government with stable but sufficient revenue,” he said.

Stoff said the roundtable has used five principles in putting together its plan growing the state’s talent base; fostering
new capital investment in manufacturing; broadening the tax base to include all segments of the economy to assure
fairness; stimulating entrepreneurial and startup business activities; and making the tax system fair, equitable and
simple.

The business group, like Taft and legislative leaders, has made overhauling the tax code to promote economic growth
its top priority, Stoff said.

He said the roundtable was spending a substantial amount and has retained former Ohio Tax Commissioner Tom Zaino
and Ernst & Young, a global business services company, to work on the plan.

The group wants to measure what tax proposals would do to increase Ohio’s gross state product, produce jobs and
create capital investment.

“All have a dynamic feedback effect on the tax revenues that are paid into the state coffers,” Stoff said.
Taft is to make public his tax overhaul proposals on Feb. 8 in his State of the State speech.

Orest Holubec, Taft’s spokesman, confirmed that the governor has been working with the roundtable.

Also, Holubec said, the “gross receipts tax is something people have talked about” and is “one of many options that
could generate revenue” to replace taxes that might be eliminated or lowered.

Holubec also said Taft is “looking at sin taxes as well,” which means taxes on cigarettes and alcoholic beverages.
“No final decisions have been made,” he said.

The debate about taxes is accompanied by pressure to control state spending.

Secretary of State J. Kenneth Blackwell is leading an effort to amend the state Constitution to mandate spending limits.
His proposal would require a three-fifths legislative majority and a vote of the people to increase spending above the
previous year’s level, adjusted for inflation and population growth.

Taft is considering a plan of his own to limit spending.

On the tax side, state Sen. Ron Amstutz, R-Wooster, chairman of the tax-writing Senate Ways and Means Committee,
said a gross receipts tax is an option that deserves serious consideration.

Amstutz said, as did others, that tax overhaul proposals are a “work in progress.”

“We want to move away from taxing business investment and away from taxing capital and toward more of a
consumption-oriented taxation that will help our economy grow,” he said.

The only other states with a gross receipts tax like the one being considered by the roundtable are Washington and New
Hampshire, according to one Ohio tax expert.

The Washington tax uses different rates for different types of business activity. Amstutz said it’s his understanding that
the roundtable’s proposal would call for more than one rate for a gross receipts tax.

Under the current corporate franchise tax, businesses are taxed on their Ohio net worth or Ohio net income, whichever
is greater. Critics, however, have said loopholes permit some corporations to pay little or no corporate franchise tax.

The corporate franchise tax accounted for 16 percent of the state’s general fund in 1977, but just 4.38 percent in 2004.
Ohio business groups had a mixed reaction to the gross receipts tax and other parts of the roundtable’s proposal.

The Ohio Manufacturers’ Association has called for replacing current Ohio business taxes with a tax that would be
broad-based, at a low rate and equitable across all sectors of the economy, said Randy Leffler, the group’s
communications director.

While the gross receipts tax would appear to fit this definition, the manufacturers have not taken a specific position, he
said.

John C. Mahaney Jr., president of the Ohio Council of Retail Merchants, called the gross receipts tax proposal
frightening for the retail sector.

“We have lots of receipts and we’re light on profits,” he said.

Mahaney said he was not enthusiastic about overhauling the tax system.

“Tax reform sounds so good. I don’t know if our taxes are so far out of whack or not,” he said.

Daniel Navin, managing director of legislative affairs for the Ohio Chamber of Commerce, the state’s largest business
group with 4,500 members, said, “It’s a positive thing that the governor and legislature are focusing on tax reform as
one way to improve this economy and create more jobs.” He said, however, the chamber has concerns about a gross
receipts tax.

He said such a tax could have a “pyramiding effect.” If an Ohio company buys something from a supplier in Ohio, that
supplier would have to pay a tax on the sale. The company buying the product then would have to pay the gross
receipts tax when it sold the product to a consumer in Ohio.

The Ohio company might look for an out-of-state supply network to avoid suppliers that had increased their prices to
help cover the gross receipts tax, Navin said.

He said the chamber has two major problems with current business taxes the tangible personal property tax and
what he called the “high marginal personal income tax rates.”

“They are the biggest inhibitors of keeping people here as well as encouraging new capital investment and jobs in
Ohio,” Navin said.

Zach Schiller, director of Policy Matters Ohio, a Cleveland-based research institute, said he’s concerned that too much
emphasis is being placed on using an overhaul of the tax code to promote economic development.

“The idea that this package of measures would lead to some big new round of economic development is a mirage,”
Schiller said.

He said Ohioans need to decide if they want to make the necessary investments in people and public infrastructure that
are needed for the state to succeed.

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Officials, study cite predatory lending as the chief culprit
By Joshua Greene

Cleveland Free Times

JUST LIKE EVERY OTHER Monday, at the Cuyahoga County Sheriff’s Foreclosure Sale on January 10, 50 homes changed hands. The room was packed with vultures, the speculators, redevelopers, bankers and small-time investors.

“I don’t think there’s this many people at a football game,” one bystander commented to another.

Half of the crowd came looking to make a good investment, while the other half was just hoping to get some of their investment back.

“The majority of the people here are looking for a steal,” says Donald Neff, a suburban real estate redeveloper who’s been at the game for 30 years. He says despite the fact that it’s a sheriff’s sale, the properties listed these days are bringing in big money. The Broadview Heights piece he came hoping to pick up for his daughter sold for $450,000. The bank ended up with that one, but Neff says he made an important contact and might still make the buy.

Neff says in the last few years, but most significantly in just this past year, the housing market has shifted.

“It’s a buyer’s market,” he says, attributing the glut of homes on the market to the abundance of easy credit extended to Americans this past decade. “People are generally overextended. Credit’s been fairly simple to obtain. Most people are reliant on two incomes. When one of them loses their job, the first thing that goes is the house.”

Evidence supports his claim. A study authored by Zach Schiller at Policy Matter Ohio called Home Insecurity 2004: Foreclosure Growth in Ohio, states that in 2003 “county sheriff departments put more than 36,425 foreclosed properties up for sale.” This number “represents a 26 percent increase from 2002 and a 57 percent increase from just two years earlier.”

In Cuyahoga County alone, there was a rise from 2,093 foreclosed properties for sale in 2001 to 4,421 auctioned off in 2004.

The data compiled by Schiller shows that while the majority of foreclosures happened in Ohio’s most populous counties, almost all the counties experienced growth in this area. Schiller says when he was doing the research for the study, he surveyed individual county sheriffs to find out the primary reason behind the rash of foreclosures.

“A majority, 31 of the 57 who answered, said predatory lending,” Schiller says.

In Cleveland Councilman Kevin Conwell’s Ward 9, at least one house now stands abandoned on almost every block, he says. He too blames predatory lending.

“It’s the predatory lending tsunami, it’s tearing up our city,” he says. “They’re killing my neighborhood. A lot of my residents just walked away from their houses.”

Conwell tells the story of a man named Mr. Williams. (“In our community, we just call the older people mister and missus,” Conwell says, explaining why he can’t remember Williams’ first name.)

“Mr. Williams … just walked away from his house on 131st and Edmonton and moved to Florida. He qualified for a second mortgage to redo his basement, but he never even got the basement rebuilt.”

The man got in so deep he just walked away, Conwell says.

“Almost every month there’s a flood of these leaflets and flyers. It’s predatory lending, but the people need money,” Conwell says.

Keeping track of the abandoned houses by the less-than-scientific method of knowing how many overgrown lawns need to be mowed, Conwell says in the last year, neglected properties have risen from 70 to 140 in his community.

“You could drive down almost any street and somebody ends up abandoning their house. Soon people begin dumping their trash in the yard. Raccoons and skunks move in. It’s affecting our quality of life,” he says.

George Zeller, senior researcher for the Council for Economic Opportunities in Greater Cleveland, says the big news is not necessarily that foreclosures are up, but that the economic downturn is no longer isolated in the city.

He says that despite urban myth, recent research his council has done shows that 85 percent of the job loss in Cuyahoga County since 2000 has been in the suburbs. Additionally, 88 percent of the manufacturing jobs lost have been in the suburbs. Cuyahoga County has lost about 64,000 jobs in the last four years. As of the week ending January 1, when 1,843 new unemployment claims were filed, Cuyahoga County was still losing jobs. Zeller says that in 1999, when the county was gaining jobs, there were 1,647 new claims for that same week.

“What most people don’t realize is that the biggest layoffs of the year happen during Christmas and New Year’s,” he says.

Along with the sky-high rate of foreclosures and evictions, the no-jobs syndrome means people aren’t paying their taxes either, Zeller says. “This is the biggest delinquency rate the county’s ever had.”

Executive Assistant to the Auditor Destin Ramsey concurs. “The number of people that are late or just not paying has risen considerably,” he says. “It’s higher than in the past. This is one of the worst we’ve seen. It’s pretty bad.”

Ramsey says this can’t help but affect services in the community. “Property taxes pay for a lot of different services. The Metroparks. Tri-C. Health and Human Services. The hospitals,” he says. “We rely on property taxes for an awful lot.”

The county sells delinquent tax cases to an outside credit collector and, according to Chief Deputy Treasurer Robin Darden-Thomas, is paid dollar-per-dollar for the debt. Despite common lore, she says the collector can and will eventually foreclose on the property. She tells the tale of a woman who came in to pay her back taxes only to find out that someone else now owned the property.

“She lost her home and didn’t even know it,” Darden-Thomas says. “Someone had purchased the property and hadn’t even contacted her.”

The extension of easy credit in an unstable economy isn’t the only reason for economic turmoil, but it’s the primary one.

“People get divorced, overextended, they lose their job or die,” says one Cleveland foreclosure lawyer, who requested anonymity. “My office handles the entire state. You see it all over the place. People want a lot of things. They stretch themselves too thin.”

The lawyer adds that despite the popular misconception, even the banks are losing money right now.

“The banks lose big on foreclosures,” he says.

Which is ironic, because it’s the banks who fought to keep State Sen. Tom Robert’s (D-Dayton) anti-predatory lending bill from becoming law. His legislative aide, Erin Davis, says what sunk the bill was that it didn’t exclude enough of the big money institutions from the prohibitions against shady lending.

“They’re not necessarily the types of institutions that we have problems with, but a lot of them have subsidiaries involved in sub-prime lending, which sometimes is construed to be predatory lending,” Davis says.

He adds that the senator will try again, this time clarifying an exclusion for the big banks. Davis says the other missing piece to the puzzle is that real estate appraisers are unregulated. If an appraiser arbitrarily raises the value of a home, a homeowner could then borrow more money against that overvalued home, and again get in over his or her head.

On its way to rectifying a situation the state can’t seem to handle, Cleveland passed its own anti-predatory lending law, touted as one of the most consumer-friendly laws in the land. But again, it’s the big banks taking the case all the way to the state Supreme Court. The law, Cleveland Codified Ordinance 659, was thrown out in Common Pleas Court, reinstated by the Court of Appeals and currently stands in limbo on its way to the high court.

The economic problem isn’t limited to homeowners.

Mike Foley, director of the Cleveland Tenants Organization, says he constantly hears from landlords who say their tenants just can’t afford to pay rent.

“We’re dealing with one problem, one issue, and that’s just a killer. The income base is just not there,” Foley says.

Lt. Gov. Bruce Johnson to play major role in pursuing tax-reform initiatives

The Akron Beacon Journal

COLUMBUS – The room was packed. Every seat and spot for standing was taken. Along the balcony, men and women leaned over the rails to peer down on Gov. Bob Taft as
he beamed and administered the oath of office to his new lieutenant governor, Bruce Johnson.

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A move to cut state income-tax rates on the most affluent would cost Ohio hundreds of millions of dollars in revenue and tilt the state and local tax system further against lower- and middle-income taxpayers. Those are the key conclusions of a review released on January 3, 2005 by Policy Matters Ohio, based on calculations made by the Institute on Taxation and Economic Policy (ITEP), a research group in Washington, D.C., with a sophisticated model of the national and state tax systems.

Currently, Ohio’s personal income tax has nine brackets. Income over $200,000 a year is taxed at a rate of 7.5 percent, and income between $100,001 and $200,000 is taxed at 6.9 percent.

Eliminating the top bracket would cost the state $114 million a year, or at least twice that during the biennial budget beginning July 1, 2005. The top one percent of Ohio taxpayers – with average income of $619,900 a year – would receive 97 percent of the tax cut. Taxpayers in this group, who each make at least $263,000 a year, would pay an average of $2,038 less a year in state income taxes. While a total of fewer than 90,000 taxpayers would receive such cuts, 5 million Ohio taxpayers – the bottom 95 percent by income – would receive no benefit from this change.

If the state eliminated both of the top brackets, so that the top rate was 5.943 percent, it would lose $434 million each year. To put this in perspective, this is nearly equal to the amount distributed by the state through the Library and Local Government Support Fund, the main source of revenue for most libraries in Ohio. It is more than double the state’s General Revenue Fund spending last fiscal year on the Department of Youth Services, or more than a sixth of such state spending to support higher education.

If the top two brackets were eliminated, more than 99 percent of the benefit would go to the top 5 percent of Ohio taxpayers. Almost four-fifths of the reduction would go to the top one percent, who would save an average of $6,234 a year. Nearly all of the rest would go to those in the next highest 4 percent, who make between $115,000 and $263,000. In short, the benefits of such a cut would be highly concentrated among the very richest Ohioans. The table below illustrates how eliminating the top brackets would affect various income groups in Ohio.

Source: Institute on Taxation and Economic Policy, December 2004

Many wealthy Ohio taxpayers would lose up to a third of these benefits due to increased federal income tax obligations, as they would have less in state income tax to deduct on their federal returns. Overall, eliminating the top two brackets would reduce their gains by 20 percent, or $89 million. Thus, this would be a dubious economic development proposal, since the net effect would be to funnel these funds out of Ohio.

An ITEP study in June 2004 found that between 2001 and 2004, the top one percent of Ohio taxpayers would receive federal income-tax cuts amounting to $90,000 apiece, on average. This far outweighs the $6,234 the wealthiest one percent would receive on average from chopping the top two state income-tax brackets. However, during the time period, Ohio has lost more than 240,000 jobs. It seems highly unlikely, if major tax cuts for this income group have not delivered economic growth, that much smaller ones are likely to have a significant impact on jobs and income.

There is little evidence to support claims that Ohio income-tax rates are hampering economic growth. States such as North Carolina and California, with among the highest top income-tax rates in the nation, developed high-technology centers that we envy. A recent survey of the economic literature by Robert G. Lynch, chairman of the economics department at Washington College, found little grounds to support tax cuts – especially when they come at the expense of public investment – as the best means to expand employment and spur growth.

Current Ohio law already reduces income-tax rates for all taxpayers when the state is running a budget surplus. Under these reductions, rates were reduced between 1996 and 2000 by a total of more than $2 billion.

Ohio’s graduated income tax is a crucial element in keeping overall state and local taxes from being overwhelmingly tilted against middle class and low-income taxpayers. Other taxes require that Ohio’s less affluent citizens pay more as a share of their incomes than richer taxpayers do. As a result, high-income taxpayers pay a smaller share of their earnings in state and local taxes than Ohioans who make less. The income tax is the main tax that to a degree offsets this, and requires that more affluent people pay more, as they can afford to do.

The bottom 60 percent of Ohio’s workers have seen little or no increase in real hourly pay over the past 25 years. By contrast, the top 10 percent saw 19 percent growth between 1979 and 2003. Cutting out Ohio’s top brackets would increase this growing inequality.

The Institute on Taxation and Economic Policy is a nonprofit, nonpartisan Washington–based research group. Its tax model is similar in methodology and data sources to the elaborate computer models used by the U.S. Treasury and the congressional Joint Committee on Taxation, except that the ITEP model adds state-by-state estimating capabilities. The figures show the effects of 2003 state and local tax laws, at 2003 income levels.

Press Release

For a later report, see Wealthiest Ohioans Gain Most From Proposed Tax Changes; Low- and Middle-Income Families, on Average, Save Little or Nothing

February 2005 release, analyzing the proposed 22% reduction in Ohio’s State Income Tax:
State Income-Tax Cut Would be Expensive, Unequal and Would Siphon Money Out of Ohio