Biennial Budget Testimony in The Hannah Report
Hannah Report - May 20, 2005
HB66 Biennial Budget Testimony
The Hannah Report
The following witnesses testified:
• Tom Zaino, Ohio Business Roundtable;
• Bill Weisenberg, Ohio State Bar Association (OSBA);
• David W. Johnson, Summitville Tiles, Inc.;
• Joe Roman, Greater Cleveland Partnership;
• Bob Milbourne, The Columbus Partnership;
• Edward W. (Ned) Hill, Cleveland State University;
• Rocky Black, Ohio Farm Bureau Federation;
• Michael Grubba, Millennium Chemicals, Inc. and Ohio Chemistry Technology Council;
• Ed Claggett, Scotts Miracle-Gro Company;
• David Reape, on behalf of The Ohio Society of CPAs;
• Jon P. Honeck, Policy Matters Ohio;
• Gene Krebs, Greater Ohio;
• Ellen Mee, League of Women Voters of Ohio.
Zaino, a former Ohio tax commissioner, said that, while no perfect tax system exists, the advantages of the proposed commercial activity tax (CAT) are “very clear and very significant, and can outweigh any disadvantages that are appropriately mitigated.” A gross receipts-based CAT, he said, is a “terrific alternative to Ohio’s current business tax system.”
Weisenberg said the OSBA supports tax reform “in principle,” but the support is not unconditional. He called for restraint in carving out exceptions to the tax foundation. He noted that compliance could be difficult, especially with respect to law firms which seek to protect proprietary, confidential matters related to their clients, inside and outside of Ohio.
With the understanding that tax reform will bring a periodic trigger mechanism for adjusting the tax rate, Weisenberg stressed that any adjustment should be subject to review by the General Assembly, the Joint Committee on Agency Rule Review or pursuant to a Chapter 119 — notification and hearing — proceeding. All in all, he said the proposal is a reasonable alternative to the current tax system and said, with enough time and genuine communication, all matters could be worked out in meetings instead of the courtroom.
He also noted that OSBA members who reviewed the proposed tax changes would have made it their number one concern if any provision of the proposal would conflict with any provision of the Ohio Constitution, especially regarding the the express prohibition on the taxation of food or the use of gas tax funds for uses other than transportation. That concern was not listed in his comments.
Johnson said the current system is outdated and the “bold overhaul” proposed in the CAT is “much fairer.” With the tremendous loss in manufacturing jobs Ohio has experienced over the past four years, Johnson said the package of tax reforms will “help prevent job loss.”
Roman said Ohio’s tax code should focus on growing the talent base in Ohio, fostering capital investment, broadening the base and lowering tax rates and stimulating entrepreneurial and start-up activity. While further improvements can be made, Roman applauded the changes as the “single most important thing we can do at this time to turn our economy around.”
Milbourne, a former tax commissioner for Wisconsin, said the changes are sorely needed and will modernize a tax system that has placed Ohio in an “uncompetitive position.” His group, composed of Columbus’ leading corporate and community leaders, believes the tax package will “make Ohio a more attractive place for large corporations, small and medium-sized companies and individuals who live and work here.”
Hill said the CAT system is “fair, flat and easy” and warned members that if tax changes don’t come now, Ohio will be in much worse condition in coming years.
Black painted a picture of farming as a rugged business venture — in 2002, the average farm in Ohio had 187 acres, $57,300 in annual all farm sales, and net cash farm income of $8,900. He said farmers, who once only paid personal income tax, will now be taxed again if their sales are over $1 million because they will be subject to the 0.26 percent CAT. He said it is still unclear whether the income tax reductions — proposed to be 21 percent by 2010 — will offset the new CAT.
After extensive review of the tax plan, Black said a flat fee of $100 that will be paid by farmers grossing between $40,000 and $1 million “is arbitrary and is already generating ill feelings among many of our members.” He suggested the fee be graduated or raise the threshold for the minimum fee to $500,000.
Grubba told committee members that “Ohio’s chemical companies are in a fight for their very survival,” which is why he and his group support the tax reform plan, which he said is long overdue.
Claggett supported the proposal, noting that it phased out two onerous taxes — tangible personal property and corporate franchise — and creates the CAT that will “spread the tax burden more equitably among all sectors of the economy.” He lauded the fairness and simplicity of the plan.
Reape, who said his professional organization has long advocated for meaningful tax reform, supports the tax plan because it is a big change from Ohio’s current system, which is “complex, punitive and a hard sell to CEOs who are considering bringing business to Ohio.” While supportive, Reape said public oversight and accountability regarding look-back adjustments are needed, the integrity of the plan should not be compromised in the future, and the “bright line nexus presence” stripped out by the House should be reinserted to avoid litigation. He also drew attention to not forcing companies to use a calendar
year to avoid needless effort and expense and asked that carve-outs — special exemptions for certain industries — be avoided.
Honeck said his group is “deeply concerned about the revenue package in this bill,” and that the key factor in tax reform is “providing a stable and adequate long-term revenue stream for the state.” Singing a different tune from those who preceeded him, Honeck said the corporate franchise tax should be retained because, otherwise, some highly profitable companies would no longer have any obligation to pay taxes in relation to their income, which he said violates the “bedrock principle of fair taxation.” He also disputed the contention by Taft and others that the income tax is a hindrance to investment in Ohio.
Honeck also took issue with the REMI model — a software calculation program used by Ohio’s Department of Development to create different tax scenarios — because it did not model all the tax increases that have been proposed.
Krebs, who tried to link tax reform with livable cities that will generate new jobs from and for bright minds, said 95 percent of plant movements in Ohio to enterprise zones were from plants and companies already in Ohio, and that even eliminating all business taxes in Ohio would not attract businesses and jobs from other states.
What will, he said, is a tax code that “encourages a walkable community and a tax credit on rehabilitation of older structures,” two measures that can stop the “brain drain of 25- to 35-year-old college educated professionals whose manufacturing plant lays between their ears, and those ears are their smokestacks.” In short, Krebs said “cool cities” is what educated minds want, and Ohio needs to figure out how to get future Charles Ketterings to stay in it.
Mee said the CAT is not the answer to Ohio’s problems, and a reduction in personal income tax rates isn’t either. What is important, she said, is fairness and equitability. Mee told legislators to 1) leave personal income tax rates as they are; 2) keep the penny sales tax; 3) implement Medicaid reforms; and 4) encourage investment in workforce development. She said her group does not think it makes good sense to “reduce state revenues significantly, while cutting essential state services.” She asked that any tax plan
passed be efficient and responsible and have adequate and stable financing.