Tax Debate Continues Before House Panel

Gongwer News Service - August 22, 2006

Policy Group Questions Impact of Recent Changes; Tax Manager Urges Speed-up of Cuts

Gongwer News Service

The House Ways & Means Committee fielded varying points of view Tuesday on the subject of “tax reform.” A business advisor relayed support for accelerating the scheduled tax cuts and a Policy Matters Ohio researcher cast doubts on the economic benefits of last year’s overhaul.

Dan Navin, the Ohio Chamber’s assistant vice president for Tax & Economic Policy, kicked off the testimony by stating his group didn’t plan to rehash its opposition to the commercial activity tax – now in the second of a planned five-year phase in. “More time must pass and data be accumulated before we can credibly assess the CAT’s overall impact on the state’s economy,” he said.

Overall, taxpayers are adjusting well to the various components of the tax system revisions (HB 66), Mr. Navin opined. He has fielded positive feedback specifically in regards to the phase out of the tangible personal property tax and the phase in of an across-the-board cut in the personal income tax, which is paid by many businesses.

“I’ve been surprised, however, by the lack of significant negative reaction to the 10% commercial rollback repeal,” he added, especially since the effect of the repeal was immediate in tax year 2005. “Perhaps one reason for the relative lack of negative reaction is that many real property taxpayers also own businesses that pay the TPP tax as well. Consequently, the trade-off works for them.”

Kathleen Hughes, a partner in the certified public accounting firm of Taylor Applegate Hughes and Associates of Springfield, spoke of the impact of the tax changes to her mostly medium to small business clientele. While few saw relief from the phase out of the corporate franchise tax because they tend to be pass-through entities such as “S” corporations and partnerships, most are paying the same or less in taxes than they did previously, she said.

“Every tax change has winners and losers. In our practice, to the surprise of some, the losers are both new and used car dealers,” Ms. Hughes said. That’s due to high CAT liability and a less-than-expected benefit from the TPP tax phase out. “Overall, our car dealer clients are currently paying between 5% and 31% more in total tax to the state of Ohio,” she said.

George Schueller, a tax manager with CBIZ Accounting, Tax & Advisory Services of Akron, lauded the legislature for its five-year plan to reduce the PIT by 21% and other changes.

“On behalf of our clients, we believe a prudent next step in Ohio tax reform would be an accelerated phase in of the scheduled Ohio personal property tax reductions and the scheduled Ohio individual income tax reductions and/or an additional reduction in individual income tax rates,” he said.

“Although tax reform will make Ohio more competitive in the future, we have found that companies considering multi-state locations are hesitant to base their decisions on uncertain phase-ins of tax reductions,” Mr. Schueller added.

Responding to a question from Rep. Fred Strahorn (D-Dayton), Mr. Schueller said tax laws aren’t necessarily the key consideration for most businesses making location decisions, however they could prove to be the deciding factor when all others are equal.

Policy Matters Ohio Research Director Zach Schiller suggested that lawmakers move forward slowly with further tax system changes. “While it’s too early to evaluate, Ohio employment has not enjoyed gains over the past year that suggest a positive impact of the tax reform,” he said.

Since the budget bill (HB 66) containing the provisions passed last June, the state has seen an employment increase of 30,000 jobs, or 0.55%, compared to 1.48% for the United States, he said in citing state and federal data. “Ohio manufacturing employment has fallen by more than 10,000 during this period, or 1.3%, while they were essentially flat – up 17,000 – for the remainder of the country.”

“These numbers, which are the most reliable job numbers available, do not support the idea that Ohio tax reform is bringing job gains.”

“We recommend that the committee look closely at whether the recent tax reforms are producing a stronger Ohio economy before you approve additional tax cuts for upper-income Ohioans and business owners,” Mr. Schiller continued. “However, if you should decide that further tax reductions are in order, an expansion of the homestead exemption is more worthy of consideration than income tax cuts.”

In response to a question from Rep. Charles Calvert (R-Medina), Mr. Schiller acknowledged the benefits to low-income taxpayers that the package entailed by excluding those who make $10,000 or less each year but he could not say offhand how many Ohioans qualified under the expanded exemption.

“These individuals are paying a larger amount of other kinds of taxes,” he added.

Rep. Larry Wolpert (R-Hilliard) asked if the witness subscribed to the economic theory that tax cuts generate revenue increases to a certain point. “It’s pretty widely accepted by economists,” the lawmaker said.

Mr. Schiller said no, in part because government research has cast doubts on the theory.

The committee took testimony on the next phase of tax system changes but did not consider any specific legislation.

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