New State Tax Debuts

Toledo Free Press - November 22, 2005

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.”

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