The committee heard from representatives from the business community and Zach Schiller from Policy Matters Ohio.

Daniel Navin, assistant vice president for tax policy, Ohio Chamber of Commerce, told the committee that the chamber's position is that the Legislature has spoken on the issue and the CAT is now a new part of Ohio's business tax structure. He said more time must pass and data be accumulated before the CAT's overall impact on the state's economy can be credibly assessed. Thereafter, he said, decisions on whether to make minor tweaks or major revisions can be discussed.

Kathleen Hughes, a certified public accountant and partner of Taylor Applegate Hughes & Assoc. LTD, said that to the surprise of some, the losers of the CAT tax are both new and used car dealers. The factors,
according to Hughes, that make the efficient car dealer a loser are:

• A quick turnover of inventory. This has allowed them to minimize and manage their personal property tax liability as they keep a relatively small inventory. This was not an effect that was originally anticipated. Therefore, the decrease in personal property tax did not benefit them as greatly as anticipated.

• The high dollar sales price of the vehicle. This yields a large current CAT liability. George Schueller, a tax manager with CBIZ Accounting, Tax and Advisory Services, said because many small businesses are taxed as pass-through entities such as S corporations and limited liability companies and therefore the high Ohio individual income tax rates continue to have a significant impact on these small business
owners. Even though Ohio has taken a major step toward tax reform, Schueller said the tax burden for small business owners whose sales exceed the $1 million gross receipts threshold of the CAT continues to be high.

Therefore, he encouraged the committee to consider an accelerated phase-in of the individual income tax reductions or an additional reduction in the Ohio tax rates.

Zach Schiller said the flattening of the income tax will lead to a greater disparity for lower- and middleincome Ohioans who pay a larger share of their incomes in all state and local taxes than most affluent Ohioans.

He said Ohio should go slow in further reducing the personal income tax saying that while it is early to evaluate, Ohio employment has not enjoyed gains over the past year that suggest a positive impact of the tax reform.

He said the proposal to exclude undistributed profits of pass-through entities from the income tax would further skew the tax system against lower- and middle-income taxpayers and would create a new enforcement issue for the Department of Taxation which would need to audit returns for profit distributions.

State law, according to Schiller, already provides for tax reductions when state finances will permit it. The Income Tax Reduction Fund automatically reduces income tax rates according to a formula that is based on the amount of surplus revenue in the General Revenue Fund. Rates were reduced in 1996 and 2000 reducing revenue by $2.27 billion. He said the law calls for the Rainy Day Fund to reach five percent of the GRF before the rates are cut. Currently, this has not been fully accomplished.

He said if the Legislature decides there should be further reductions, an expansion of the homestead exemption is more worthy of consideration than income tax cuts.

Hannah Report  8/23/2006

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