The Hannah Report

With the Nov. 8 passage of the constitutional amendment — Issue 1, the General Assembly must now take up legislation to implement the Third Frontier amendment.

The amendment said that the General Assembly would provide for ensuring the accountability of all state funding provided for the purposes described in the amendment.

The amendment also instructed the General Assembly to include economically disadvantaged businesses and individuals in all areas of this state in its implementation.

Policy Matters Ohio points to a bipartisan “Agreement in Principle” which was reached by legislative leadership last summer on the implementing language. It called for “accountability, integrity and transparency with respect to the disbursement of funds for the three component of the bond issuance.

Policy Matter Ohio goes on to say: “In order to ensure accountability and maximize benefits, the Legislature should also consider the following recommendations:

“* Disclosure rules that provide a full accounting for the progress being made by beneficiaries of the program, as well as public access to records and meetings;

“* Periodic outside review of the program by the Auditor of State;

“* Availability to the State of Ohio and local governments at favorable terms of products and services commercialized using Third Frontier funds;

“* A transparent and competitive selection process for loans, grants, and all other forms of assistance;

“* Competitive bidding for all contracts let by the Ohio Department of Development (ODOD) and other state agencies for program administration and requirements for the review of potential conflicts-of interest by contractors and their employees;

“* Expansion of the Third Frontier Advisory Board in keeping with the amendment’s promise to include economically disadvantaged businesses and individuals and to better reflect the broad range of policy issues affected by the program; and

“* A thorough, outside review of the issues raised by public funding of the creation, use, and disposition of intellectual property, which will serve as the basis for a legislative study committee on this topic.”

According to Speaker Jon Husted’s (R-Kettering) office, the House is waiting on the language for the enabling legislation to be completed by the governor.

People’s Weekly World

By Judy Johnson

CLEVELAND — Hold onto your hats! Ohio’s recently passed Issue 1 could mean a lot of different things. Only time will tell exactly what Ohio voters did on Nov. 8. But voters across the country would be well-advised to study these developments carefully, as similar proposals are bound to show up in other states in future elections. Try not to fall asleep as you need on, as the issues are a little complex.

In the Nov. 8 election Ohio voters passed the ballot initiative known as Issue 1, a constitutional amendment allowing the state of Ohio, its state universities and local governments to become shareholders in private companies and to share in any resulting financial gains. The amendment also allows the issuance of general obligation bonds to directly aid industry, up to $500 million over 10 years.

The amendment overrules prohibitions against the state government or any local government investing public money in private companies, a prohibition that has been in place in Ohio for over 150 years. The amendment makes “public purposes” out of local government public infrastructure, financial support for research and development and the development of sites and facilities in Ohio that support industry and commerce.

The amendment included support for Gov. Bob Taft’s “Third Frontier” program, which was defeated by voters in 2003. It is widely believed that the amendment passed this time because it coupled a bond program for meeting infrastructure needs with money that, supporters argued, will stimulate research and development. According to these supporters, this could mean the creation of up to 96,000 jobs, earning roughly $55,000 per year. Ohio has been ravaged over the last four years by the loss of at least 200,000 good-paying manufacturing jobs.

The amendment was supported by business, labor, politicians, and many other groups, and it passed with 63 percent in favor, 36 percent opposed.

In a cautionary note, Policy Matters Ohio, a nonpartisan think tank which took no position on the issue, warned that the state will be obligated to meet its payments to bondholders no matter what the financial state of the state. “The risk of general obligation debt is that debt service will crowd out discretionary programs in difficult financial times,” said the Policy Matters report. Interest payments would equal more than one out of every four dollars of debt service over the life of the program.

Concern about the new, close relationship between public and private funding was voiced by former Ohio state Rep. Bill Schuck. Shuck stated: “If some private companies in which the state and local governments invest grow and become profitable, public budgets will increasingly depend on direct corporate earnings rather than taxes. This is bound to change how government officials think and act.” Jon Honeck, author of the Policy Matters report, said, “A closer relationship between public and private interests in economic development policy will be the enduring legacy of the amendment.” The Ohio League of Women Voters supported Issue 1, with Linda Lalley, the group’s co-president, stating, “While we have lingering concerns about expanding ‘public purpose’ to include private-sector recipients, we are willing to risk it with this proposal to improve the economy.”

Schuck, in his analysis, asked: “If a government agency’s budget depends on corporate dividends, how willing will it be to impose environmental controls on, seek taxes from, or examine the labor practices of the company?” The examples one could cite are endless. “If,” he asks, “a local government invests in a local company, and the company’s stock ought to be sold or its management replaced, what will a county commissioner, township trustee, or mayor do when that action is opposed by managers who are community leaders or by a large number of employees who are voters?”

The president of Public Citizen, Joan Claybrook, was even more sharply critical, telling the Cincinnati Enquirer, “Government normally oversees and regulates industry. Here they’re integrated into one.” Bill Allison of the Center for Public Integrity told the same newspaper, “Government should not be in the business of picking stocks.”

According to the Ohio Committee on Corporations, Law and Democracy, the new amendment is very similar to a law passed in 1837, which allowed direct investment of public funds in private corporations. The state went into deep debt. The law was repealed in 1842, and a constitutional amendment was passed in 1851 prohibiting joint ownership or direct investment of public funds in private corporations. This constitutional prohibition has been in place ever since.

According to the Policy Matters Ohio report, “Whether the public sector uses its expanded authority successfully will depend on the vigilance of the Legislature and the appropriate state agencies in defining and tracking the public interest in economic development policy.”

Needless to say, public vigilance will be required to carefully watchdog and be ready to take action if the use of public monies turns out to primarily benefit private industry at the expense of the public good.

The new amendment also contains a requirement missing from the failed 2003 amendment that all of Ohio’s regions receive benefits, and that the state provide access to the program by economically and socially disadvantaged individuals and businesses.

Dayton Daily News

by William Hershey

COLUMBUS | Supporters of a campaign to raise Ohio’s minimum wage to $6.85 an hour said they gathered 45,000 signatures on Election Day in an effort to get the proposal on Nov. 7, 2006 ballot.

“It’s a moral imperative to raise the minimum wage,” Tim Burga, legislative director of the Ohio AFL-CIO, said at a Statehouse news conference.

Burga was joined by Senate Minority Leader C.J. Prentiss, D-Cleveland, and other representatives of Ohioans for a Fair Minimum Wage – a coalition of labor, faith-based, civil rights and community groups.

In Ohio, the federal minimum wage — $5.15 an hour — applies to employees of companies that engage in interstate commerce or have gross annual sales of more than $500,000.

Nearly 92,000 Ohio workers — about 1.9 percent of the state’s employees — earn less than the federal minimum wage, according to a report last April by Policy Matters Ohio, a Cleveland-based research group.

For those who don’t qualify for the federal minimum wage, the state minimum wage ranges from $2.80 per hour to $4.25 per hour, based on their employers’ gross annual sales.

Only Ohio and Kansas have state minimum wages lower than the federal minimum, according to the U.S. Labor Department Web site.

The coalition has until Aug. 9 to gather signatures from 322,899 registered voters – 10 percent of the votes cast in the last governor’s race – to get the issue on the ballot. Burga said so far about 50,000 have been gathered, including the 45,000 on Nov. 8.

The Ohio Chamber of Commerce, the state’s major business advocacy group, opposes the proposal.

“We see it as a short-term fix for a long-term problem,” said Tony Fiore, the chamber’s director of labor and human resources.

“People are paid based on their skills, not on their needs. People who lack skills or work experience needed to earn higher wages are going to be among the first people to lose their jobs when wages go up,” he said.

Under the ballot proposal, the state minimum wage would go to $6.85 an hour on Jan. 1, 2007 and after that would be annually adjusted for inflation.

Also, under the proposal, the federal minimum wage would apply to employees younger than 16 and to employees of businesses with annual gross receipts of $250,000 or less.

Gongwer News Service

Auto Industry Aid: Issue 1 isn’t the only priority bill that’s come under some criticism of late. Policy Matters Ohio sent a letter to lawmakers this week warning that a proposal to significantly expand the Job Retention Tax Credit program (HB 414) would severely diminish state tax revenue and possibly result in job losses.

Delphi Corporations recent announcement of a company reorganization, which entails job cuts that could hit the Dayton area hard, prompted the bill’s introduction at the behest of Speaker Jon Husted (R-Kettering). (See Gongwer Ohio Report, November 3, 2005)

Policy Matters Research Director Zach Schiller said the bill, while written to apply only to General Motors Corp., Ford Motor Co., DaimlerChrysler, Honda of America and Delphi by virtue of the minimum 7,500 Ohio workers required to qualify for the tax credits, would “drain state revenue and subsidize companies that reduce their Ohio workforce without providing real assurances that it will retain additional jobs in Ohio.”

As proposed, Honda could tap into the tax credits “without making additional commitments beyond what they have already planned to do anyway, Mr. Schiller wrote. On the other hand, Delphi might experience difficulties in qualifying based on requirements of economic soundness that must be determined by the Ohio Tax Credit Authority.

Mr. Schiller noted the proposed tax credit expansion would also erode the base of the new commercial activity tax (CAT), currently in a five-year phase-in period. As it stands now, the CAT is not an adequate revenue replacement for the taxes it is replacing,” he said. “This new credit is unfair to other taxpayers, including the many other automotive suppliers in Ohio, and is a recipe for state fiscal problems.”

Finally, the researcher said the current proposal allows companies such as Delphi to access the credits even if “shuts down most of its Dayton-area operations,” as long as other plants in the state remain open. “In fact, it could move operations out of the country, and those operations could benefit from the credit if they shipped product to Ohio,” Mr. Schiller said.

Gongwer News Service

Critics have already taken aim at two priority bills that have yet to be heard in committee but could see action by the end of this year’s legislative session. Among them is a measure, to be introduced as soon as next week, to implement components of the $2 billion bond package endorsed by voters Nov. 8.

A key criticism of Issue 1 during the campaign was that by expanding state bonding authority to research and development projects, policymakers were reversing decades of Ohio Constitution prohibitions against direct government ownership of private enterprises.

The critics included the Buckeye Institute for Public Policy Solutions, a free-market think tank based in Columbus, as well as Policy Matters Ohio, a non-profit research group in Cleveland that focuses on issues concerning low- and middle-income workers.

Although Issue 1 faced no organized opposition, the matter of government ownership raised concerns even among advocates of what was sold as a job-generating package, and promises to be a subject of debate as the Legislature deliberates the implementing measure.

The concerns arose in 2003 when the $500 million “Third Frontier” high-tech research component was placed on the ballot as a stand-alone proposal, with the aforementioned groups generating studies that warned of the implications. Prior to the issue’s rejection by voters, Governor Bob Taft promised the state would not exercise such an option and that the issue would be addressed later in an implementation bill. (See Gongwer Ohio Report, October 29, 2003)

Development Director and Lt. Governor Bruce Johnson, Mr. Taft’s point man on this year’s campaign, has reiterated that position, spokesman Bill Teets said, but it remains unclear how the issue will be dealt with in legislation if at all.

“It’s not the administration’s intention to own companies, but he doesn’t know if it will end up in the final implementation or not,” Mr. Teets said this week. “Even though we provide assistance (to companies with the bond funds), it doesn’t put us in a position of ownership.”

The ballot issue was written like it was to provide enough flexibility in the bond-issuing process, Mr. Teets said. “Our intention was not to open the floodgates to allow for state-owned companies.”

The subject of some last minute brokering in the General Assembly to gain minority Democrat votes for its ballot placement, the package’s implementation will also be scrutinized heavily in regards to hot-button issues involving prevailing wage and statewide access to the programs.

The administration wanted to have the bill processed by the end of the year, but legislative leaders had yet to receive the final language as if Wednesday. Nonetheless, the bill is expected to emerge next week, setting up the possibility of hearings in December.

The House previously canceled tentative sessions for the week of Dec. 6, but the Senate still has that week set for full sessions and both chambers still have the week of Dec. 13 slated for full sessions.

Issue 1 Debt: The Third Frontier bonds are to be issued over seven years with a maximum 20-year maturity period, according to the Legislative Service Commission’s Fiscal Note. Up to $100 million in debt may be issued in the first three years of the program, and as much as $50 million a year is allowed in the final four years.

Issue 1 also included $1.35 billion in bonds for local infrastructure and capital improvements to be issued over 10 years, effectively continuing a popular bond program that was slated to expire next year. The local project bond program still has $240 million in remaining debt authority, LSC said. The new issuances are expected to begin in December 2009 and continue through 2018. The new debt is capped at $120 million in the first five years and $150 million in the last five years.

The other component of Issue 1 entails $150 million in site and facility development bonds to be issued over a seven-year period for the Job Ready Sites program. Those bond issuances are capped at $30 million a year in the first three years and at $15 million in the final four years, according to LSC.

Under the constitutional amendment, the payments made to retire the Third Frontier and Job Ready Sites debt will not count against the state’s 5% indebtedness cap, which is based on the prior year’s spending of general revenue and lottery profits.

The Hannah Report

In a message he sent recently to members of the House Economic Development & Environment Committee on the effects HB414, Zach Schiller of Policy Matters Ohio expressed his concern that the the policy response contained in the bill is not the best course of action for the state. The bill would change the criteria under which manufacturers of automobiles and automobile parts are eligible to receive the job retention tax credit, Schiller said it will drain state revenue and subsidize companies that reduce their Ohio workforce without providing real assurances that it will retain additional jobs in Ohio. He said there are “numerous flaws in the bill as written, which would make five companies in the state — General Motors, Ford Motor, Daimler Chrysler, Honda and Delphi — eligible for credits based on their employment of at least 7,500 Ohio workers.”

According to Schiller, HB414 would allow healthy companies such as Honda to participate without making additional commitments beyond what they have already planned to do anyway. Given the company’s investment of $1.77 billion in its Ohio facilities between 1999 and 2003, Schiller believes the investment requirements of $125 million over three years and $10 million at each project site are weak.

In addition, he said the bill would further erode the newly created Corporate Activity Tax (CAT), which was supposed to be a fair tax applied at very low rates without loopholes. According to the Ohio Department of Taxation, Schiller said the General Assembly already has approved tax exemptions and credits that will reduce CAT collections by more than $200 million a year when it is fully implemented.

If HB414 generates another $100 million in annual credits, as one news report has indicated, Schiller said it would mean that fully one-fifth of all prospective new CAT revenues will have been eliminated before one cent of this new tax has been collected. “As it stands now, the CAT is not an adequate revenue replacement for the taxes it is replacing,” he said, adding that this new credit is unfair to other taxpayers, including the many other automotive suppliers in Ohio, and is a recipe for state fiscal problems.

While Schiller said healthy companies such as Honda are able to take advantage of the new credit, it is far from clear that Delphi will be able to do so. Under the proposed bill, the Ohio Tax Credit Authority must determine that, “the taxpayer is economically sound and has the ability to complete the proposed capital investment project. (O.R.C. Section 122.171(D)(2)). The authority also must find that, “the taxpayer intends to and has the ability to maintain operations at the project site for at least twice the term of the credit.

Policy Matters Ohio has analyzed House Bill 414, a proposal to give new incentives to large automotive employers in Ohio. The measure will make the new Commercial Activity Tax less fair and efficient and it may subsidize companies that reduce their Ohio workforce without providing real assurances that it will retain additional jobs in Ohio.

On February 1, 2006, policy liaison Wendy Patton testified on HB414 before the Ohio House Committee on Economic Development and the Environment. Read Wendy’s testimony here. 

Read our analysis of House Bill 414.

Toledo Free Press

In an attempt to encourage economic development, Ohio has scrapped two of the primary taxes on business — including a tax on corporate profits — and replaced them with a broader, low-rate tax.

The Commercial Activity Tax (CAT) will be phased in during the next five years, while the corporate franchise tax and the Tangible Personal Property Tax (TPP) will be phased out.

By widening the parameters to include all companies with taxable gross receipts — sales or fees paid for services provided — of $150,000 or more a year, the tax can be enforced at a lower rate, said Gary Gundmundson, communications director for the Ohio Department of Taxation.

The CAT will generate enough revenue to offset some of the lost tax dollars from the elimination of the two taxes it is replacing, he said.

“As the economy grows naturally, revenues from existing taxes grow along with it so that the revenue that was reduced [from the loss of the other taxes] is recovered, in effect, from economic growth,” Gundmundson said, Estimates on the loss of revenue when the tax switch is fully implemented in 2010 are more than half a billion dollars, said Zach Schiller of Policy Matters Ohio, a think-tank based in Cleveland.

“Conservatively, we will see a minimum of $600 million less for the phase out of these two taxes for the CAT,” Schiller said. “Why in the world would we pass a socalled tax-reform package that reduced the amount businesses are paying by $600 million?”

Lee Wunschel, an accountant with the Toledo firm Lublin, Sussman Group C.P.A.s, said the negative effects of the corporate franchise tax and the TPP tax were not beneficial to the economic climate in the state, but there is apprehension over the CAT.

“I think there is a lot of uncertainty in the business community, whether the CAT is going to create a more favorable business environment,” Wunschel said.

Part of the motivation for replacement of the corporate franchise tax was its increasing difficulty to collect, Wunschel said.

The corporate franchise tax represented more than 15 percent of the revenue for the state in 1980 and fell every year after that; last year that number fell to less than 5 percent

The corporate franchise tax proved to be easily evaded through exploitation of the tax code, Gundmundson said.

“We saw, with the corporate franchise tax, multi-national corporations
that most people would believe are profitable — some were paying no tax in Ohio,” Gundmundson said. “Profit is a commodity that can change depending on how it’s viewed.”

These actions were not necessarily illegal and Gundmundson estimated the ODT audits corporate franchise filings more than any other.

Since the CAT is fundamentally different, it will be harder to escape, Wunschel said.

“There certainly were some tax-planning approaches to minimize the corporate franchise tax,” Wunschel said. “Since it’s based on gross receipts, corporations will not be able to avoid the tax.”

Gundmundson said he agrees but would not guarantee the infallibility
of the CAT.

“There have been adjustments to tighten up the code but it’s a constantly shifting terrain,” Gundmundson said.

Schiller said efforts by the Ohio General Assembly to weaken the corporate income tax are partially responsible for its decreased viability and lobbying by the manufacturing sector doomed the TPP.

“Businesses don’t like to pay taxes; nobody likes to pay taxes,” Schiller said.

He added a study done by Policy Matters Ohio shows, while businesses would like to avoid taxes, it is not the deciding factor in business location. The skills of the local labor force and proximity to customers were both more important causes, Schiller said.

If the changes won’t affect economic development more than nominally, Schiller said the costs to local and state government won’t be worth it.

All revenue from the TPP stays in the hands of local governments.

Schools are the biggest recipient of its largesse — roughly 70 percent.

Gundmundson said the state will fully cover affected districts for TPP revenue losses until 2010 and then begin to phase out reimbursements gradually until 2018.

Since TPP applies mostly to companies with large amounts of equity, primarily manufacturers because of the need for costly machinery, inventory and factories — areas that are reliant on that base will lose the revenue entirely in 2018.

This could result in “dire financial straits for communities around the state,” Schiller said.

The CAT and the consequential tax phase out are only two parts of the governor’s tax reform package, along with reducing the sales tax, the real property tax and the personal income tax.

Recently, the state launched a national marketing campaign under the theme “Ohio means business.” Gundmundson said the tax reform package is one of the assets being promoted.

“The net of all this is business tax payers, when all the changes are phased in, will realize tax cuts of more than a billion dollars a year,” Gundmundson said.

Many operating costs and taxes are simply passed on to the consumer, Schiller said, but it’s difficult to know exactly who will ultimately pay the CAT.

In some cases it will be passed directly on to the customer and in others the corporation will eat the cost, Schiller said.

“If you are an auto parts company in Ohio and you ship to the Jeep plant, you are going to have to pay this tax,” Schiller said.

“Will DaimlerChrysler pay the extra amount of the tax or not? We don’t know.”

A survey of some of the 1580 Cleveland-area tax filers who received free tax assistance through sites in a local tax coalition found that nearly half claimed the earned income tax credit (EITC). Of these, nearly a quarter did not know if they’d previously been eligible for the credit and more than 16 percent had not filed taxes at all the previous year. Of those who had previously gotten the EITC, nearly 40 percent had previously paid for tax preparation, and about 15 percent had paid extra for an early refund. Such fees can cost more than $300 for a $1500 credit according to the Brookings Institution.

These are encouraging results. More working families in our community are getting the credits they deserve and avoiding expensive fees.

Press Release

Executive Summary

Full Report

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Main EITC Page

The General Assembly soon will take up legislation to implement Issue 1, the constitutional amendment passed by Ohio voters on Nov. 8. To ensure that government funds are spent in the most effective manner and provide the greatest benefit to Ohioans, the implementing legislation should ensure the accountability of all public funds used for Third Frontier projects by all levels of government, universities and other nonprofits, and the private sector. A Policy Matters Ohio brief recommends specific steps the legislature can take to provide such safeguards.

Policy Matters Ohio Research Analyst Jon Honeck testified Dec. 6, 2005, before the Senate Finance & Financial Institutions Committee about Senate Bill 236, the implementing legislation for the amendment. Policy Matters made additional recommendations for the Third Frontier portions of S.B. 236, including, among others, requirements that all members of the Third Frontier Commission file public disclosure forms and that companies provide detailed information about the types of jobs that were created with state support.

Policy Brief

Read the Testimony