Out with the Old, in with the New
Columbus Dispatch - July 10, 2005
Tax change expected to aid manufacturers
by Jeffrey Sheban
Who benefits from the most sweeping business-tax changes in Ohio in 40 years?
One likely winner is the state’s beleaguered manufacturing sector, which has shed 200,000 jobs in the past five years, leaving 800,000.
“I don’t think it’s a secret that manufacturing and the great jobs that go with it are leaving Ohio to go to Mexico and China and places like them,” said Mark A. Engel, a partner at Columbus law firm Bricker & Eckler.
“This is part of the Taft administration’s effort to stop the jobs drain.”
Picking winners and losers under the new plan, enacted this month as part of the latest two-year budget, is difficult. Results will vary based on each company’s circumstances.
In general, supporters said the revisions are long overdue, bringing Ohio tax rates in line with other states and simplifying a system that had grown complicated, inefficient and riddled with loopholes.
The biggest change is the elimination of two business taxes and the creation of a new one.
The tangible-personal-property tax and corporation-franchise tax are being phased out by 2009 and 2010, respectively.
The personal-property tax is levied on the value of equipment, machinery, inventory, furniture and fixtures. As such, it hits manufacturers, construction companies and warehouse operators hard.
The corporation-franchise tax is based on a company’s Ohio profits or the value of its business, whichever is higher. Many large companies dodge this tax through accounting — by shifting profits to out-of-state affiliates and claiming their Ohio operations show no profits and have no value. As a result, smaller companies have paid a higher share of this tax over the years.
The new tax that will replace them is the commercial-activity tax, to be phased in by 2010.
It will be levied on the gross receipts, or sales, generated in Ohio. The 0.26 percent rate is considered low, but the tax base has been broadened to cover virtually every business in the state with annual sales of more than $1 million. The tax amounts to $2,600 for each $1 million in Ohio sales.
Companies with sales of up to $150,000 are exempted, and those with sales of $150,001 to $1 million will pay a flat fee of $150.
For manufacturers and other capital-intensive businesses, the elimination of taxes on equipment and machinery is expected to encourage investment in Ohio.
“The changes are historic and positive,” said Ryan Augsburger, lobbyist for the Ohio Manufacturers Association, which counts 1,800 companies as members.
“We are encouraged that the reforms will go a long way in stabilizing job loss and hopefully reversing the trend,” he said.
Zach Schiller, research director of Policy Matters Ohio, said there’s not much chance of that occurring.
A study commissioned by the Taft administration, which proposed the tax changes, concluded they would create 43,000 jobs in Ohio by 2010, he said.
“It’s just not a significant number considering we have 5.5 million workers,” said Schiller, whose organization is a nonprofit public-policy group in Cleveland.
He said other factors besides taxes — including quality of work force, roads and other infrastructure, and access to suppliers and consumers — do more for job creation.
“The notion that this kind of overhaul is going to bring a major change in investment and jobs is not very likely,” he said.
Retail is one sector that could pay more under the new tax structure. While the state’s shopkeepers, grocers and others with large inventories support the end of the tangible personal property tax, they aren’t wild about its replacement, the commercial-activity tax.
That’s because taxes based on sales don’t take profitability into account. So a discount retailer, grocery store or fast-food restaurant, for example, with high sales volumes but low profit margins, could lose out.
“We believe overall, (the changes) are not good for retailing,” said Ohio Council of Retail Merchants lobbyist Lora L. Miller.
On the plus side, retailers with major distribution hubs in the state — including Columbus-based Limited Brands, Abercrombie & Fitch and Big Lots — won’t miss taxes on inventory.
And all retailers stand to benefit by the reduction in the state sales tax to 5.5 percent from 6.0 percent, to the extent it increases sales.
Finally, many businesses will get a break from a 21 percent reduction in personal-incometax rates phased in over five years. That will help smaller firms, partnerships and limited liability companies that pay business taxes through their owners’ personal-income taxes.
One exception could be a smaller business with sales over $1 million that will be subject to two taxes — personal-income tax and the new commercialactivity tax.
“What is most troubling is the prospect of double taxation with the family businesses,” said Michael R. Baker, senior manager of Cleveland-based accounting firm Plante & Moran. “They’ll be at a competitive disadvantage.”
While the experts agree that no tax system is perfect, there is a widespread belief that the new tax structure in Ohio, when fully implemented in 2010, will be more simple and fair than before.
Tax writers “wanted to give a shot in the arm to those business segments that drive Ohio’s economy,” Engel said.
“Time will tell.”