Republicans Push Budget Bill Out of Committee After Making Numerous Changes to Tax Provisions, Other Areas

Gongwer News Service

The $51.2 billion biennium budget bill emerged from committee late Tuesday with most major provisions relatively intact, including the biggest overhaul of the state’s tax code in decades. Among the more notable changes included in a roughly 600-page omnibus amendment are an expanded exemption against the new “commercial activity tax” for businesses and a rewrite of the nursing home Medicaid reimbursement formula starting in fiscal year 2008.

The party-line report by the Senate Finance & Financial Institutions Committee sets up a Wednesday floor vote on the bill (HB66). Sen.President Bill Harris (R-Ashland) said he has enough support in his caucus to pass the bill. Senate Democrats are expected to oppose it en masse.

The bill will then head to House-Senate conference committee deliberations, with revenue updates tentatively set for next week. Medicaid and education-related issues are at the center of several matters of difference between the two chambers.

For their part, minority Democrats let their extensive differences with the bill be known through about 20 amendments, all but two of which were tabled by Republicans who control the chamber 22-11 and the committee 9-4.

In offering the Senate Democrats’ alternative budget proposal in the form of an
omnibus amendment, ranking minority member Sen. Tom Roberts (D-Dayton) said the GOP package fell short in terms of fair taxation, support for local governments and higher education, aid to the poor, and several other areas.

While the minority’s plan protects funding for local governments and human services for the poor, and enhances the economy with prudent tax policies, he said, the GOP bill scares constituents in part by the unknown effects of the new business tax code and gives short shrift to needy citizens at the same time it provides tax breaks for the rich. “This budget will hurt more people than it will help,” he said.

Sen. Dan Brady (D-Cleveland) agreed, calling the package “the worst budget I’ve seen in my lifetime here in Ohio.”

“I don’t think this bill reflects the diversity of this state,” Sen. Brady said, predicting there would be extensive problems with schools, local governments and tax collections as a result. “They are problems we have created for the future of this state.”

Finance Chairman John Carey (R-Wellston) defended the measure, saying such gloom-and-doom predictions reminded him of the debate 10 years ago over welfare reform, which has been a success.

Sen. Carey acknowledged there are risks inherent in implementing CAT as well, but given the state of Ohio’s economy, he said, “The reality is, we have to do something different.”

“The bill does present a bold vision,” Sen. Carey added. “But the risks are worth taking for Ohio’s future.”

As did the House the month before, the Senate thus far has embraced the gross receipts-based CAT as a viable alternative to the corporate franchise tax, which like the tangible personal property tax is slated for a phase-out in the budget bill. The bill also sets a five-year reduction schedule for the personal income tax, which at the end of the cycle would drop by 21% across the board.

The measure provides minor increases for K-12 and higher education and entails the most extensive Medicaid reforms of any budget bill in recent memory. The bill provides that costs in Medicaid, a $10 billion program that has seen double-digit increases in recent years, would rise only moderately over the next two years. The goal, if reached, would be accomplished through reimbursement rate freezes and the reduction or elimination of state funding for certain programs.

Among the more controversial changes made through the omnibus amendment was language restructuring Bureau of Workers’ Compensation investment and governance policies, which have come under question in light of a growing scandal over a collectible coin fund. The changes include certain disclosure requirements for BWC Oversight Commission members.

Another change in the omnibus amendment removes the longstanding tax exemption for gold bullion and collectible coins, the announcement of which prompted chuckles among those in attendance – most if not all who are familiar with the ongoing, so-called “Coingate” scandal – during the committee’s morning hearing. The change, which Sen. Harris said has nothing to do with the controversy over the BWC coin investments, is expected to save the state about $3 million a year in previously foregone revenue. Officials could not say how or if the removal of the tax exemption would affect the state’s plans to divest the multi-million dollar BWC coin fund.

Democrats tried unsuccessfully to add more BWC changes to the bill, including restrictions on campaign contributions by investment managers and more authority for the inspector general’s office to pursue investigations. (See separate story)

After Republicans first tabled the proposal, the panel unanimously adopted a Democratic amendment offered by Sen. Roberts to require regular audits of BWC by the state auditor.

Sen. Charlie Wilson (D-St. Clairsville) also won unanimous support for an amendment that strips the bakery business fee hike from the bill.

In an amendment sponsored by Sen. Tom Niehaus (R-New Richmond), the Senate added about $22 million in federal Temporary Assistance to Needy Families funds to raise reimbursement rates for childcare and a new Early Learning Initiative, a program designed to replace the failed Head Start Plus concept. Sen. Niehaus said the changes and additional money resulting from raising the childcare provider reimbursements from the 60th to the 65th percentile of market rates would boost provider participation and help make the program successful.

Sen. Wilson endorsed the change, saying it would help providers serve an additional 10,000 children in FY 2006 and 12,000 in FY 2007.

Another amendment separate from the omnibus, offered successfully by Sen. Ron Amstutz (R-Wooster), clarifies the CAT review criteria on which the state would make future adjustments to the tax rate depending on the flow of revenue. Along with changes in the economy, savings from Medicaid program reforms would be considered in making the adjustments, he said.

The omnibus amendment increased from $40,000 to $200,000 the amount of sales a business can make before being subjected to the CAT, and also raises the annual minimum fee from $100 to $175. Sen. Amstutz said the two changes are roughly revenue-neutral, and that they would ease some administrative burdens for small businesses.

Separately, the research and advocacy group Policy Matters Ohio reported Tuesday on an apparent flaw in the CAT rate mechanism added previously by the Senate. Research Director Zach Schiller identified some potential problems related to CAT adjustment mechanisms, including a permanent revenue cap starting in 2010, after the new tax is fully phased in.

Mr. Schiller said the cap language would result in the decline of the CAT intake in relation to the economy and share of state revenue over time. Senate officials said the provision is under review.

Nursing home interests, which have seen some favorable House amendments either stripped or significantly changed by the Senate to more closely match Governor Bob Taft’s more restrictive funding proposals, took another hit with a provision affecting the permanent law reimbursement formula. The change, if it clears conference committee, represents a significant policy shift for the nursing home industry.

Responding to the administration’s concerns that a new reimbursement formula added by the House would result in an $800 million “balloon payment” after the next biennium, the Senate amended the bill to implement a new statutory formula beginning in FY 2008 that “is based on a price model as opposed to a cost model and includes quality incentive payments,” according to a GOP synopsis. That means the administration, rather than mostly funding the facilities’ costs as submitted, would set prices for certain services and then reimburse the facilities.

Another nursing home-related change made through the omnibus “provides that a (nursing facility’s) reimbursement rate for FY 2006 and FY 2007 may be adjusted to reflect a change in the NF’s capital costs due to certain change of provider agreements or certain reviewable activities for which a (Certificate Of Need) application is filed.”

Nursing home interests are expected to vigorously oppose the changes along with a “tiered” approach to reimbursements previously amended into the bill.

While there are no major surprises in the omnibus amendment, as always, there are numerous significant policy adjustments affecting a variety of Ohio Revised Code sections. A few of the other notable examples:

–the imposition of new record-keeping and auditing requirements for contractors doing business with government entities.

–an increase in the vender discount fee for sales tax collections from .75% to .9%, which retailers project will save about $11 million a year for businesses across Ohio that file the taxes on a timely fashion. The tax-related changes are among a total of 36 amendments in the omnibus that affect tax and development sections of the ORC.

–language providing for the restoration of local school boards’ management rights in districts declared to be in “Academic Distress” and under the supervision of a state-appointed commission.

–several changes affecting charter, or community, schools, including Internet-based startups.

–the maintenance of current law limiting state-supported early childhood programs to school districts and educational service centers.

–several additional education earmarks, including $1.5 million for Disadvantaged Pupil Impact Aid to support the Cleveland voucher program in FY 2006, and $1.5 million in FY 2007 for school bus purchases.

–a revamped school funding formula

–the addition of six new members to the Ohio State University Board of Trustees.

–revised university enrollment cap language that bases the cap on the number of full-time students as opposed to the full-time equivalent (FTE).

–placement of the tuition rate cap in temporary law instead of permanent law.

–a requirement that the Board of Regents, in adopting rules for the Ohio College Grant, include provisions giving priority to low-income students who meet certain academic performance standards in primary and secondary school.

–numerous adjustments to the Medicaid managed care pilot program for the Aged, Blind and Disabled service recipients.

–language reflecting a compromise on administrative proposals to eliminate the intermediate care facilities for the mentally retarded (ICF/MR) Medicaid funding stream and replace it with an individual-based waiver. The provision creates a phased-in pilot program for the new waivers.

–authority for the Department of Job and Family Services to limit the scope of optional Medicaid dental and vision services in order to stay within reduced appropriations for the coverage.

–a narrowing of the CAT exclusion for insurance companies and their subsidiaries.

–creation of a Telecommunications Personal Property Tax Study Committee to review differing tax rates of the entities.

–a requirement for the state tax commissioner to compile a list of licensed cigarette distributors.

–alignment of the Third Frontier development program prohibition against financing embryonic stem cell research with the policies of President Bush.

–the establishment of a consumer call center funded jointly by the Public Utilities Commission of Ohio and the Ohio Consumers’ Counsel. Both entities currently operate separate call centers.

–adjustments to House-added provisions affecting the water quality certification program within the Ohio Environmental Protection Agency.

–authority for the ODJFS director to “establish, change and abolish positions of employment that are classified civil service” and make similar changes, including demotions, for exempt employees in classified civil service.

Sen. Ray Miller (D-Columbus) was critical of the latter amendment, which he described as an attempt to “subvert” collective bargaining laws, the OSU trustee board expansion and other omnibus amendment provisions. “What bothersome about these amendments is there are things that were never discussed” in committee, he said.

Among the Democratic amendments tabled by the GOP members were proposals to: create a Legislative Audit Commission; require a Webcast of each legislative committee meeting; increase funding for human services programs; eliminate the Medicaid estate recovery provision in the bill; restore the Community Alternative Finding System (CAFS) for
Medicaid; strip a provision allowing schools to privatize busing services; restore the Central State University support line item to FY 2004 levels; allow the Commission on Minority Health to grant employee pay raises, and; restrict and eliminate school employee “reduction in force” language that gives school boards more leeway in cutting employment costs.

Sen. Roberts, whose amendment would have eliminated the RIF provision, termed it “egregious” and added: “This shouldn’t be seen as a first step to trim the fat.”

Ohio s proposed Commercial Activity Tax (CAT) on businesses, which in its House
version already did not raise as much revenue as the taxes it is to replace, has been further
weakened in the bill now pending before the Senate Finance Committee. This version of
the bill permanently caps total revenue collected at a predetermined level after fiscal year
2010, so that it inevitably would decline in relation to the economy and as a share of state
revenue. The Senate committee also added more credits and exemptions. These two
sources of erosion will undercut CAT revenues significantly and belie the claim that it is
a broad tax relatively free of special-interest provisions.

Press Release

Dayton Daily News

Gov. Bob Taft’s remedy for a stagnant economy will create more economic woes, according to a
report released Monday by Policy Matters Ohio.

The state budget pending before the Ohio Senate would phase out the corporate franchise tax and
the tangible personal property tax businesses pay on equipment, machinery, inventory, furniture
and fixtures. It would create a broad-based, low-rate commercial activity tax on business gross receipts from sales in
Ohio.

The changes, phased in over five years, are intended to stimulate manufacturing and make the state’s tax structure more
equitable.

But companies would pay the commercial activity tax whether or not they showed a profit and Policy Matters Ohio, a
nonpartisan research institute, says Ohio’s economy needs only a stronger, redefined corporate franchise tax, which is
based on businesses’ profits or net worth, whichever is greater.

Taxing profits is “a bedrock principle of fair taxation,” according to the report.

The report estimates that by 2010, the commercial activity tax will generate $1.55 billion for the state, while $2.15
billion will be eliminated by the tax changes creating a $600 million gap.

This includes money the state would pay to local communities and schools to make up for revenue lost from the
tangible personal property tax.

“It’s fiscally irresponsible. Most of this gap doesn’t materialize until beyond this biennium,” said Zach Schiller, author
of the report and research director of the Cleveland-based institute. “Some future legislature will have to deal with the
mess that they’ve created.”

Mark Rickel, Taft’s spokesman, isn’t convinced

“The governor is proposing a commercial activity tax that, with its low rate, brings an equitable approach to business
taxes,” he said.

He noted that a report conducted for the state showed 47,348 jobs would be created by 2010 as a result of the tax
changes.

“By bringing equity into the tax rates, all companies will be able to benefit,” Rickel said.
Senate President Bill Harris, R-Ashland, also has favored the tax phase-outs and creation of the commercial activity
tax.

The Senate today will release its version of the budget, which the Finance Committee is slated to vote on next Tuesday.
Action by the whole Senate is expected June 1.

Indiana got rid of its commercial activity tax in 2002, after officials felt it was discouraging new business start-ups and
firms from locating in their state.

The Ohio Chamber of Commerce, which supports “80 percent” of Taft’s tax package, fears the same, said Daniel J.
Navin, director of the chamber’s legislative affairs.

“There are demonstrable inequities and new burdens created for particular kinds of industries that we have argued
could be addressed by keeping the corporate franchise tax, but to reform it,” he said.

Taft has described the current corporate tax as doubly flawed: high rates discourage companies from locating here,
while loopholes allow companies to avoid paying part of the tax.

Policy Matters Ohio proposes combined reporting, or a single tax filing for all of a company’s related operations.
Currently, businesses with multistate operations can file separately and shift reported income, to avoid higher taxes in
one state, Schiller said.

“It’s an entirely legal method of tax avoidance,” he said.

Policy Matters also said the state should consider making “passthrough entities” subject to the corporate franchise tax.
These are businesses whose proprietors pay individual income taxes on their business earnings.

Policy Matters also recommends eliminating the franchise tax’s cap on net worth payments, which it says discriminates
against small businesses and costs the state close to $100 million a year; eliminating or limiting credits that weaken the
tax, and adding a provision that would tax sales made by Ohio producers in other states where they are not subjected to
tax.

Full Article (PDF version)

Gongwer News Service

SB 11 MINIMUM WAGE (Prentiss) To raise the standard minimum wage to $6.15 an hour beginning January 1, 2006, then to $7.15 an hour beginning January 1, 2007, and to require an annual adjustment of the standard minimum wage each year based on the consumer price index for urban wage earners and clerical workers.

Tim Burga, legislative director for the Ohio AFL-CIO, said that Ohio and Kansas are the only states that do not provide a state minimum wage at least equal to the federal level. He said the current federal minimum wage of $5.15 per hour has not been increased in nearly nine years, and that the Ohio minimum wage, “which in practice is $3.35,” was established in 1990. SB 11 would boost the state minimum to $6.15 per hour on January 1, 2006 and to $7.15 per hour on January 1, 2007. It would increase the minimum wage payable to certain tipped employees to $3.07 and $3.57 on the same timetable. “Thirteen states and Washington D.C. now have minimum wages above the federal level, two states have approved wages above the federal that have not yet taken effect, and two states, Maryland and Nevada, passed increases which may be implemented,” Mr. Burga said. “It’s time for Ohio to reclaim its spot as a state that values its workers.”

Samuel Gresham, president of the Columbus Urban League, said there has been an increase in the number of working families unable to meet their basic needs. He said a person working fulltime at today’s minimum wage earns about $10,700 a year. “How can anyone raise a family on that amount of money? Hard-working Ohioans should be able to live outside of poverty if they are willing to put in 40 hours a week,” Mr. Gresham said. He pointed out that Columbus is experiencing a significant influx of immigrants from Mexico and elsewhere who are competing for low-skilled jobs. “There appears to be a race to the bottom for wages,” Mr. Gresham said. “How can you allow an American citizen to work 40 hours a week with no health benefits and remain in a state of poverty?”

The Ohio Association of Second Harvest Foodbanks said hundreds of thousands of people are working at jobs that pay poverty wages and provide no health or retirement benefits. “While Ohio is trying to build a new frontier of high-paying, high-tech jobs, what is growing are our low-wage, no-benefit jobs,” said Lisa Hamler-Fugitt, executive director. She said minimum-wage workers and their families arrive in growing numbers at one of the organization’s 3,000 food pantries, soup kitchens, shelters, day care, and community centers. “Raising the minimum wage will help families meet their basic needs and build our state’s human capital and long-term economic security,” she said.

Wendy Patton of Policy Matters Ohio said that while the state’s current minimum wage of $4.25 an hour is lower than the federal level, the federal wage applies to most workers in the state. “The proposed Ohio legislation would directly affect 446,000 earning less than $7.15 an hour,” Ms. Patton said. Research that the non-profit, non-partisan institute conducted showed 60% of those who would get a raise are women; more than 70% are age 20 or older; and 75% work at least 20 hours weekly. She cited a series of studies to demonstrate that enactment of the bill would not result in a loss of jobs, would not force jobs out of the state, and would not result in substantial price increases. “Business owners that responded to a National Federation of Independent Business survey ranked the minimum wage issue 57th in importance,” Ms. Patton said. “Remember that anyone forced to raise wages will be competing with employers who have also been forced to raise wages.” Chairman Hottinger suggested, based on talks with small business owners, that one reason for the low ranking of the issue is that many already pay above the minimum wage.

Gongwer News Service

Separately, government program advocates and researchers issued studies of budget-related issues recently, finding fault with majority Republicans’ plans to eliminate the corporate franchise tax and the tangible personal property tax.

On Monday, the Cleveland-based Policy Matters Ohio released a study entitled “Strengthen, Don’t Scrap Ohio’s Corporate Franchise Tax” and argued that the plan to replace the CFT and the tangible personal property tax with a gross receipts-based “commercial activity tax” falls short for a number of reasons, including the fact that the CAT receipts won’t fully replace the estimated $2.26 billion in estimated foregone revenue by 2011.

“Wiping out the corporate franchise tax would mean that highly profitable companies no longer would have any obligation to pay taxes based on their profits, violating a bedrock principle of fair taxation,” states the report, which provides a few recommendations for altering the CFT to make it more productive as a revenue source and more difficult to skirt by aggressive “tax planning.”

On Friday, the Cleveland-based Center for Community Solutions issued reports on the impacts of the TPP tax repeal on schools and local governments, and Ohio’s reserve of Temporary Assistance to Needy Families (TANF) federal block grant funds.

The Center also released on Monday a paper arguing for the spending of more funds by the Department of Job ands Family Services on childcare and the Early Learning Initiative in the budget. On the latter subject, the Center’s researchers suggest the agency has available funds to more fully finance the initiative.

The Hannah Report

With Gov. Bob Taft’s tax reform plan running hard as it nears completion of the second leg of the Ohio Triple Crown of legislation, Policy Matters Ohio (PMO) is advising state Ohio Senate policymakers to reconsider strengthening the corporate franchise (CFT) tax instead of scrapping it as Taft’s plan does.

Designed to reconfigure a Depression-era tax system for the 21st century, the Taft tax plan has already been changed in the House, and is undergoing more changes in the Senate. Last week, Senate Republicans said they will increase tobacco taxes to offset eliminating increases in alcohol and other tobacco product taxes, real estate transfer fees and funding of Ohio’s children’s hospitals.

But PMO, a Cleveland tax research group, also urged tax reformers to take another look at the corporate franchise tax, an excise tax levied on the value of a corporation’s issued and outstanding shares of stock — a tax Taft wants to eliminate.

PMO said replacing the CFT with a commercial activity tax (CAT) — based on a company’s gross receipts — for non-financial companies would make Ohio one of only six states in the country without a corporate income tax. While the CAT has some positive features, PMO says it should not be used to replace the corporate franchise tax for a number of reasons.

PMO agrees with other tax reformers that the CFT has been weakened so that it does not produce the revenue it once did, due to legislation that has allowed it to be legally circumvented.

An example PMO cites is a bill passed in 1999 by the General Assembly that capped how much companies must pay on their net worth. As many as 19 of the state’s top 50 companies benefited from this cap in tax year 2004, saving millions of dollars. In a recent summary of the tax plan, PMO said it is wrong to weaken a tax, then eliminate it because it has been weakened. A better approach, it said, would be to strengthen it, which could be done easily enough through steps cited below. These include measures to keep companies from planning around the tax.

Even though many big companies manage to limit what they pay under the franchise tax, a number of others continue to pay a significant amount. In tax year 2003, the last year for which such data are available, 95 companies paid at least $1 million, or $204.5 million in total. Though collections remain hundreds of millions of dollars below late 1990s levels, they increased 30 percent in the first 10 months of fiscal 2005, to $774 million. This indicates that the tax remains viable.

PMO said wiping out the corporate franchise tax would mean that highly profitable companies no longer would have any obligation to pay taxes based on their profits, violating a bedrock principle of fair taxation. Some companies would pay millions of dollars less than they do now. Yet it likely would add to the tax burden on low- and middle-income taxpayers, who already pay more of their income in state and local taxes than do affluent Ohioans. Manufacturers are not unduly burdened by the corporate franchise tax, so its abolition is not likely to spur manufacturing investment.

Critics argue that Ohio’s corporate franchise tax should be eliminated because its relatively high rate discourages businesses from operating here. However, Ohio ranks well below average in how much revenue the tax brings in. Most companies are likely to review the taxes they would actually pay, not tax rates that may never be imposed in reality. In any event, taxes are a secondary factor in corporate location decisions. One recent report commissioned by the Ohio Department of Development found that the CAT would be better for the Ohio economy than the two taxes it is designed to replace. But the difference is tiny, and uncertainties such as which companies ultimately would pay the CAT makes it hard to predict the effect one way or the other.

According to PMO’s analysis, Ohio should adopt the following reforms to bolster the franchise tax while making it fairer to those who already pay, and to make sure business pays its fair share of state and local taxes:
• Require companies to report all of their related operations in a single, combined tax filing,
cutting down tax planning that shifts income out of Ohio and artificially lowers corporate
franchise taxes;
• Eliminate the cap on net worth payments, which discriminates against small businesses and costs the state close to $100 million a year;
• Eliminate or limit credits that are steadily weakening the tax;
• Add a throwback provision, under which Ohio would tax sales made by Ohio producers in other states where they are not subjected to tax; and
• Consider bringing pass-through entities such as S Corporations and limited liability companies under the tax, as Kentucky has just done with its corporate income tax.

On May 20, 2005, Policy Matters Ohio’s Research Analyst Jon Honeck testified before the Ohio Senate Finance & Financial Institutions Committee regarding the tax law changes in the biennial budget bill (H.B. 66). Dr. Honeck described how the proposed commercial activity tax would not fully replace all of the revenues from the corporate franchise tax and the tangible personal property tax, the two taxes that would be phased out. He also pointed out that the consultant’s study paid for by the state to model the impact of the tax law changes was incomplete and misleading because it did not take into account the need for spending cuts or other tax increases to make up for the revenue shortfall that would result from the plan. (Click here to read Policy Matters Ohio’s critique of the consultant’s study.) In addition, the testimony outlined some preliminary findings from an upcoming Policy Matters Ohio study that refutes the notion that Ohio’s income tax plays a role in our loss of population to other states.

In March, Dr. Honeck testified before three other legislative committees on earlier versions of the budget. He described how the tax changes would generate insufficient revenue in 2006-07, result in a net revenue shortfall of $2.1 billion by 2010 when compared to extending the current tax structure, and shift the tax burden from wealthy individuals to the poor and middle-class. The income tax cut would result in one-seventh of the reduced payments to the state being shifted to the federal government because of lower deductions on federal tax forms.

Within the state, a substantial amount of the income-tax cut would go to the top one percent of taxpayers. They’d get an average $8,080 tax break, while taxpayers with incomes of less than $16,000 a year would receive an average of $19 in savings. All families in the state would end up paying more when they use nursing home care, higher education or other services, while seeing quality of public services decline.

1-Page Fact Sheet: Why the Taft Plan for Income Tax Cuts is Not Good for Ohio

Read Jon Honeck’s Ohio Senate Finance Committee Testimony on HB 66 May 20, 2005

Read Jon Honeck’s Ohio Senate Ways and Means Testimony on SB1 March 16, 2005

Read Jon Honeck’s Ohio House Ways and Means Testimony on HB1 March 3, 2005

Read our Fact File: The Taft Plan for Income Tax Cuts is Not Good for Ohio

Ohio stands on the brink of eliminating its corporate income tax for nonfinancial companies, known as the corporate franchise tax. Under the budget bill passed by the House of Representatives in April, the corporate franchise tax would be replaced, along with the tax on tangible personal property, with a new gross receipts tax called the Commercial Activity Tax. This would make Ohio one of only six states in the country without a corporate income tax. While the CAT has some positive features, it should not be used to replace the corporate franchise tax.

The franchise tax has been weakened so that it does not produce the revenue that it once did. Many of the state’s largest companies are able to plan around the tax system and reduce their liability. A major reason for the weakness of the tax is state legislation that has allowed it to be legally circumvented.

Under the bill passed by the House, the replacement tax would not come close to substituting for the amount of taxes being collected under the levies that it would replace. This would reinforce the long-term trend in Ohio for taxes to shift from business to individuals, and leave a revenue hole of hundreds of millions of dollars a year for future legislatures to fill. If the General Assembly decides to create a Commercial Activity Tax, it should at the very least ensure that the new tax generates as much revenue as that which is lost.

Wiping out the corporate franchise tax would mean that highly profitable companies no longer would have any obligation to pay taxes based on their profits, violating a bedrock principle of fair taxation. This May 2005 report explains that it is not sensible tax policy to abolish a tax on the supposed grounds that it is too weak, and replace it with one that is even weaker. It outlines steps that can be taken to strengthen the franchise tax instead of scrapping it.

Executive Summary

Full Report

Dayton Daily News

By William Hershey

Although Gov. Bob Taft’s proposed overhaul of the tax system is aimed at
boosting manufacturing in Ohio, the retail sector would gain the most jobs under the proposal,
according to an analysis released this week by the Development Department.

The analysis broke down by category the additional 47,348 jobs that would be created by 2010,
based on a study produced by REMI Consulting of Amherst, Mass. The state paid $154,000 for the study.

Lt. Gov. Bruce Johnson released the study last month but a breakdown by job type was not available. The study
compared what employment would be as the result of proposed tax changes with it would be under the current tax
system.

According to the analysis, the top five categories for additional jobs would be: retail, 9,517; construction, 5,728; food
service, drinking places, 5,211; manufacturing, 4,237 and state and local government, 2,942.

The study results released in April by Johnson showed an additional 43,250 jobs overall but that was by fiscal year
2010, from July 1, 2009 to June 30, 2010. The new analysis was based on additional jobs by calendar year 2010.

According to the analysis, about 8.9 percent of the additional jobs would be in manufacturing. Currently, about
15.7 percent of Ohio’s jobs are in manufacturing, according to the state, the largest percentage of any job sector.

The analysis also found that about 20 percent of the additional jobs by 2010 would be in retail. Currently, about 11.8
percent of the state’s jobs are in retail.

The REMI analysis was based on a tax proposal including: a phased-in 21 percent reduction in personal income tax
rates; phasing out the corporate franchise tax and the tangible personal property tax on business machinery, equipment,
inventory, furniture and fixtures; a state sales tax of 5.5 percent it’s now 6 percent statewide; increased taxes on
cigarettes, beer and wine and phasing in a low-rate, broad-based commercial activity tax on business gross receipts
on Ohio sales.

Bill Teets, development department spokesman, said the jump in retail and food service jobs represents an economic
boost from the income tax cuts that will put more spending money in Ohioans’ pockets.

Also, he said manufacturing jobs have been declining, partly due to increased efficiency. “We put together a tax plan
that we said was going to better reflect Ohio’s economy and our overall economy is a mixture of manufacturing and
services,” Teets said.

Zach Schiller, a critic of the tax proposal, said, however, the analysis appears to indicate the plan would fall short of
being the “savior for manufacturing” that Taft’s “rhetoric” had suggested.

Schiller, research director for Cleveland-based Policy Matters Ohio, said he is skeptical of the overall study because it
did not consider the need to either reduce state spending or increase other taxes because the tax changes would produce
less state revenue than the system now.

Full Article (PDF version)

Gongwer News Service

HB 66 BIENNIAL BUDGET (Calvert) To make operating appropriations for the biennium beginning July 1, 2005 and ending June 30, 2007, and to provide authorization and conditions for the operation of state programs.

Set aside for issues surrounding the tax code overhaul in the bill, Friday’s hearing was dominated by proponents of the plan, which includes the creation of a “commercial activity tax” to replace the tangible personal property tax and the corporate franchise tax. A dozen witnesses either testified or submitted written comments on the tax package, and most generally reiterated prior statements delivered to the House and Senate Ways & Means panels.

Tom Zaino reiterated the support of the Ohio Business Roundtable for the plan and OBR President Richard Stoff submitted written testimony to that effect. Mr. Zaino again confronted some concerns and skepticism from lawmakers but maintained the CAT and other changes made through the plan would be a vast improvement over the current system.

In response to concerns from Sen. Brady about the provision granting the tax commissioner authority to adjust the CAT up or down if the collections are off by 10% or more, Mr. Zaino said, “It’s really an administrative function. There’s no discretion.”

After Sen. Padgett shared the story of a constituent who said he’d likely move his business out of the state if the CAT passes, the former tax commissioner said: “I would submit that the current system is driving a lot more people out of the state than the new system will.”

Sen. Clancy said she’s still hearing complaints from businesses with high sales volumes and low profit margins and asked whether it would make sense to just retain the penny sales tax and forget about the CAT.

Mr. Zaino replied that most retailers and other similarly situated businesses would see relief from the “huge burden” of the inventory and other components of the TPP tax once they are eliminated. He added of the sales tax increase: “Keeping the penny will not replace the revenue of the CAT” and noted, “on a proposal like that you would be replacing a business tax with a consumer tax.”

William Weisenberg, of the Ohio State Bar Association, asked the panel to refrain as much as possible from providing exemptions from the CAT. “To do so would in all likelihood result in revenue projections not being met and the tax rate subject to an upward adjustment.”

Mr. Weisenberg outlined other areas of concern to OSBA such as compliance, the maintenance of confidentiality in dealings between businesses and the Department of Taxation and the aforementioned rate adjustment. On that subject, he suggested the tax commissioner’s changes be reviewed by the Joint Committee on Agency Rule Review to add another layer of checks and balances to the system. “With these caveats recognized, the (OSBA) believes that the tax reform plan, as presently constituted, is a reasonable alternative to the existing tax structure,” he said.

In fielding several questions regarding the constitutionality of taxing transactions involving gasoline and food, Mr. Weisenberg said he was not an expert in that legal area but that a panel of the association’s tax lawyers had reviewed the proposal prior to OSBA’s endorsement. “If there had been a serious constitutional infirmity here, I’m sure they would have brought it to your attention,” he said.

Summitville Tiles, Inc. President David Johnson, chairman of the Ohio Manufacturers’ Association, again relayed his group’s support for the package and addressed a specific issue the Senate has been reviewing for possible change. “Don’t be fooled by those who argue that the new commercial activity tax, or CAT, will be unfair to S corporations…and who support their position with charts and tables that tell an incomplete story. Earnings are taxed differently for C corporations and S corporations, but this has nothing to do with the commercial activity tax,” he said.

Jon Honeck, representing Policy Matters Ohio, reiterated his group’s leeriness with the CAT and overall revenue estimated for the new tax scheme. “A strengthened, more effective corporate franchise tax would have brought in $500 million more than the FY 2004 level” of receipts, he said. “We see no point in devising a completely new and even unique system of business taxation only to have the amount of revenue collection remain inadequate.”

David Reape, testifying on behalf of the Ohio Society of CPAs, said the package represents an improvement over the current system but he asked the panel to make some changes to House-passed language. Those include: JCARR oversight of the “look-back rate adjustments,”; limiting “carve-outs,” or exemptions; reinsertion of the “bright line” nexus presence test; and a mandated calendar-year approach to CAT calculations.

Ellen Mee, of the League of Women Voters of Ohio, said, “We want to see tax reform that provides stable funding for the state’s human resources programs and reduces structural deficits.” She said the League believes that neither the CAT nor the personal income tax rate reductions in the bill are the “right answer” for the state and that the panel consider: retaining the penny sales tax hike slated to expire June 30, implementing more Medicaid reforms and encouraging workforce development.

Rocky Black, of the Ohio Farm Bureau Federation, said the group’s board believes “the governor is making a much-needed effort to reform Ohio’s outdated tax system and to bring back a more competitive and robust economy to Ohio” through the proposals. He said there’s “room for improvement” in the package, however, citing the $100 minimum CAT for farmers and small businesses grossing between $40,000 and $1 million. The provision, he said, “is arbitrary and is already generating ill feelings among many of our members” who wonder why smaller businesses would pay the same as a $999,999 operation.

Cleveland State University Economics Professor Ned Hill urged panelists to ignore a recent Wall Street Journal editorial panning the proposal. “Fiscal responsibility dictates that business taxes cannot simply be cut, they need to be restructures,” he said. “The tax burden needs to be shifted to encourage capital formation and productivity increases, and a replacement tax is required.”

Joe Roman, of the Greater Cleveland Partnership, and Michael Grubba, manager of U.S. purchasing for Millennium Chemicals, Inc. and speaking on behalf of the Ohio Chemistry Technology Council, also supported the bill.

Former Rep. Gene Krebs, now of the Smart Growth group, presented the panel with a study on the economic impact of the rehabilitation investment tax credit program in North Carolina and prepared testimony from a colleague in support of a similar program for Ohio. He urged the committee to start the process of looking at “how we design, plan and build our communities.”