Trust Taft & Co. With Tax Reform?

Akron Beacon Journal - June 26, 2005

The worry behind the governor’s feat
By Michael Douglas

The Akron Beacon Journal

State Sen. Marc Dann neatly framed the mystery surrounding Bob Taft and his failure to report golf rounds as gifts on his financial-disclosure statements. The Youngstown Democrat explained to reporters last week that the governor “lives in a bubble,” with schedulers and other minders ushering him through practically every step.

They missed such details? Even with Taft lecturing others about the need to comply with every letter of ethics requirements?

Dann and his colleagues won’t relent in attempting to apply the classic scandal hold to Republicans: The misdeeds, from Thomas Noe, the coin con man, to the governor’s evidently forgettable golf game, suggest either willful pay-to-play or merely miserable management. Corrupt or bungling? Neither option flatters.

Actually, it could be worse — for the rest of us. The Statehouse buzzed last week, even talk of resignation on tongues, ludicrous as the notion seemed. All but missed in the frenzy was passage of the two-year, $51.2 billion state budget, including, most notably, a sweeping overhaul of the way Ohio taxes businesses. The extent of the tax changes can hardly be exaggerated. (All the details have yet to be fully pondered.) Recall the early 1970s, the state first adopting an income tax? This effort represents the most dramatic change since then.

During the next five years, the state will eliminate the corporate franchise tax (on profits or net value). Gone, too, will be the tangible personal property tax, on business inventory and equipment, inviting cheers of good riddance, outmoded and punishing as it is.

In their place? A commercial activity tax, a levy on gross receipts.

Bruce Johnson, the lieutenant governor and director of the state Department of Development, pitches the new tax as “one of the most fair and innovative in the nation.” Add unique, Ohio fashioning its own version of a tax applied by a mere handful of states. Might Ohioans be concerned that all of this has been championed by a governor and team that botched the mandated reporting of his golf dates?

As a concept, the commercial activity tax has a certain appeal. It features the key elements of a sound tax, a broad base and a low rate, 0.26 percent on virtually all business transactions. In that way, the thinking goes, the state raises sufficient revenue without too many businesses complaining about an onerous take and clamoring for relief in the form of various breaks, exemptions and loopholes.

Those who are most enthusiastic gush that the bulk of businesses will hardly notice the bite. They insist the microscopic rate will draw firms to set up shop in Ohio, or at least remain and expand here, all of it triggering the long-needed economic rebirth.

The governor talks about the tax reflecting the “benefit principle,” that businesses should pay taxes based on the services they receive from state and local governments (roads, water, sewer and the like), no matter how profitable they are. Reasonable as that may sound, it represents a stark departure, the state operating for years (at least in theory) on the notion that businesses should pay taxes based mostly on the money they make.

Grocers and other high-volume, low-margin firms have cried foul. Critics have warned about the pyramiding effect, the tax levied at each step of a business process, the accumulated impact packing more punch than the low rate would suggest. As the measure wound through the legislature, lobbyists took their whacks, and the troubling thing has been how successful they have proved. A tax that supposedly eschews the relevance of profits has already been nicked here and there by special interests concerned about the impact on their bottom line.

Petroleum marketers won a temporary exemption. That prompted state Rep. Dale Miller, a Cleveland Democrat, to wonder aloud about the threat of creeping inconsistency, even to ask: Why not treat grocery stores the same way? Bill Harris, the Senate president, explained that the petroleum crowd made a more persuasive case about the disproportionate effect, even waving the threat of job losses.

Equally persuasive, apparently, were financial institutions and insurance companies, plus foreign trade zones and those promoting a development at the Rickenbacker Airport in Columbus. They all won exemptions. The point isn’t that these episodes of tax relief will soon cost the state a gusher of money. They won’t. Rather, the erosion has already begun — before the tax has become law.

The governor has the option of using his line-item veto to strike the exemptions from the final budget. If he does, that will do little to ease worries about the special pleading to come once the many complexities and other wrinkles surface. Any tax code is vulnerable to such forays. Look at the holes in the corporate franchise tax. In this case, the concerns are compounded. Noble as the commercial activity tax may appear on paper, it has become widely despised in places such as the state of Washington.

Taft and company insist they have learned from others. Let’s hope so (knowing the governor’s tenure will expire before the tax takes full effect). There is reason to doubt, beyond the golfing goofs. Policy Matters Ohio measured the demise of the corporate franchise tax and the tangible personal property tax against the likely revenue raised by the commercial activity tax. The Cleveland think tank found the state short roughly $600 million a year.

Isn’t one key principle of a sound tax system its capacity to cover the cost of state needs and priorities?

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