Ohio tax loopholes worth closing
Cleveland Plain Dealer - March 15, 2011
by Zach Schiller, in The Cleveland Plain Dealer
The debate over Ohio’s state operating budget gets under way for real today when Gov. John Kasich’s two-year budget proposal is revealed.
As the General Assembly considers the budget proposal, here’s something that deserves close attention: the $7 billion in exemptions, credits and deductions from state taxes that otherwise would be paid each year.
This means that more than $1 in every $4 that the state would collect instead is not due. These exemptions and loopholes, known as “tax expenditures” because they amount to state spending through the tax code, include:
• Special breaks for special industries, such as a credit for brewers and beer importers for paying beer and malt-beverage taxes early, and a sales-tax cap for affluent buyers of time shares in jet aircraft. Under this tax cap, a buyer who otherwise might pay $8,000 or $10,000 in state sales tax pays just $100.
• A tax break for banks that is much greater than the entire corporate franchise tax they pay (this exemption, for good will, appreciation and abandoned property, amounts to an estimated $186.8 million this fiscal year, compared to $132.4 million estimated for tax to be paid).
• The $1.7 billion sales-tax exemption for manufacturers on purchases of machinery, equipment, supplies and fuel, which amounts to more than the tax revenue generated by each penny of the state’s sales tax. This exemption has not been examined since it was last overhauled in 1990. While most states with sales tax have such an exemption, is it sensible to leave this so long without a review?
• A credit for previous operating losses against the Commercial Activity Tax — available only to companies that had $50 million in losses before that tax was established. Lose a little, and the state can’t help you. Lose a bundle, and you qualify.
These are just some of the tax expenditures that are a permanent part of the tax code, with no regular review. Altogether, the Ohio Department of Taxation totaled up 122 of them — a number that probably will increase in a new report due today.
The number actually would be greater if you included services that aren’t taxed, such as lobbying.
It doesn’t include the Dealers in Intangibles Tax, which allows mortgage brokers and payday lenders to pay a lower tax rate than banks do. The last two major studies of the Ohio tax system each recommended the elimination of this tax.
Nor does the report include state subsidies of local property taxes that go to all property owners, regardless of income. These added up to almost $1.7 billion last fiscal year. As governors, George Voinovich and Bob Taft both attempted to cap these subsidies so they would be available only up to a certain home value. In 2007, Jon Husted, the speaker of the Ohio House, similarly wanted to means-test the homestead exemption for seniors. All failed, regrettably.
Other states, such as Arizona and Washington, have been conducting regular reviews of their tax expenditures. Oklahoma, Colorado, Iowa and Kansas have reduced tax credits. The Ohio Manufacturers’ Association has said the sales tax is “riddled with exemptions, carve-outs and credits” and called for a comprehensive review.
Ohio’s state support for early childhood education, mental health programs, libraries and other services all came under the knife as revenues fell. If you want to appeal your home’s tax valuation beyond the Board of Revision, you’re now looking at a two-year wait for a hearing because the legislature couldn’t find another $1 million to support the Board of Tax Appeals.
Even without the revenue shortfall Ohio is experiencing, the General Assembly should periodically review these tax expenditures. Before making major cuts in crucial services such as public education, slashing local aid and forcing layoffs of police and firefighters, and further shredding our safety net, tax exemptions, credits and deductions should be fair game.
Schiller is research director of Policy Matters Ohio, a nonprofit, nonpartisan research institute based in Cleveland.