Biennial Budget Testimony by Jon Honeck cited

Gongwer News Service - May 20, 2005

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.”

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