Strengthen, Don’t Scrap, Ohio’s Corporate Franchise Tax

May 22, 2005
   

Ohio stands on the brink of eliminating its corporate income tax for nonfinancial companies, known as the corporate franchise tax. Under the budget bill passed by the House of Representatives in April, the corporate franchise tax would be replaced, along with the tax on tangible personal property, with a new gross receipts tax called the Commercial Activity Tax. This would make Ohio one of only six states in the country without a corporate income tax. While the CAT has some positive features, it should not be used to replace the corporate franchise tax.

The franchise tax has been weakened so that it does not produce the revenue that it once did. Many of the state’s largest companies are able to plan around the tax system and reduce their liability. A major reason for the weakness of the tax is state legislation that has allowed it to be legally circumvented.

Under the bill passed by the House, the replacement tax would not come close to substituting for the amount of taxes being collected under the levies that it would replace. This would reinforce the long-term trend in Ohio for taxes to shift from business to individuals, and leave a revenue hole of hundreds of millions of dollars a year for future legislatures to fill. If the General Assembly decides to create a Commercial Activity Tax, it should at the very least ensure that the new tax generates as much revenue as that which is lost.

Wiping out the corporate franchise tax would mean that highly profitable companies no longer would have any obligation to pay taxes based on their profits, violating a bedrock principle of fair taxation. This May 2005 report explains that it is not sensible tax policy to abolish a tax on the supposed grounds that it is too weak, and replace it with one that is even weaker. It outlines steps that can be taken to strengthen the franchise tax instead of scrapping it.

Executive Summary

Full Report

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