Loose Ohio Law, Practice Lets Business Taxes Leak Away
Posted November 05, 2002 in Op-Eds
Amid the corporate scandals capturing headlines this year, another nearly invisible scandal has been battering the state budget.
The corporate franchise tax — Ohio’s corporate profits tax — has been withering. In the mid-1970s, the levy accounted for 16 percent of the taxes supporting the state’s main fund for operations, its General Revenue Fund. Last fiscal year, the amount had fallen to 4.6 percent. Though increases in collections from other taxes are a major part of the change, revenues from the corporate franchise tax now have declined for four years in a row. Adjusted for inflation, they are below even the worst recession year of the early 1980s.
You may think that is because companies aren’t making as much money, and that is certainly part of it. But the decline started when the economy was still booming. Changes in Ohio law that weakened the tax and wide-scale tax avoidance by multistate companies have contributed importantly to the decline.
Companies are able to find legal ways around the tax. A common tactic involves shifting income to subsidiaries in other states that will not be taxed as heavily as the Ohio affiliate would be. The Ohio Department of Taxation estimates that the state would take in roughly another $200 million a year under the tax if it adopted a rule followed in California and 15 other states. That rule requires each company to report on its operations as a combined entity, eliminating transactions between various subsidiaries.
Ohio’s tax is stronger than in some states because it requires companies to pay a percentage on either their profits, or on their net worth (their assets minus their liabilities), whichever would be higher. This net-worth tax makescompanies subject to taxation even if they hide their income, and makes for a more stable source of tax revenue.
Since 1999, legislators have capped the net-worth tax at $150,000. That discriminates against small businesses and lets large companies avoid paying more than that amount in net-worth taxes. It also means that state revenue drops more steeply when the economy falters. Ohio should eliminate the cap, providing a stronger backstop against tax avoidance.
To keep the tax viable and ensure fairness among employers, the state also should stop creating new kinds of tax credits and develop stricter standards for those we have now.
Last year, for instance, Ohio approved a job creation tax credit worth $2.6 million over 10 years for Wal-Mart Stores Inc. for a warehouse that was already under construction in Washington Court House.
Ask yourself: Was that tax break needed?
Ohio isn’t the only state whose corporate income tax has been wasting away. Such taxes are shriveling elsewhere, too, for some of the same reasons. But in some other states, officials have begun to raise the veil of secrecy that surrounds such taxes. In New Jersey, 30 of the top 50 employers paid only the $200 minimum tax, including 10 with combined 1999 state profits of $2 billion. In Alabama, 619 companies doing business in the state in 2000 paid no state income taxes on a total of $850 million in profits.
We know that major corporations in Ohio are legally avoiding hundreds of millions of dollars in corporate franchise taxes annually. But which companies are paying taxes and which aren’t; which are supporting the state’s roads, schools, prisons, human services and economic development efforts, and which aren’t? We have no way to know. In Wisconsin, by contrast, citizens can request whether a particular company filed a return and what its liability was in a given year.
Cracking down on corporate tax avoidance isn’t likely to hurt the Ohio economy. The franchise tax does not cover most new Ohio businesses, so it is not a major barrier to business formation (In fact, another reason that less franchise tax revenue is being collected is the proliferation of new kinds of business entities that are not covered by the tax; instead, their owners pay individual income taxes on their earnings).
The impact of business taxes on new investment is uncertain, at best. States that have strong rules against corporate tax avoidance are well represented among those that have achieved good manufacturing job growth.
Ohio businesses are paying a much smaller share of state and local government costs than they did 25 years ago, partly because of the weakening corporate franchise tax. The state needs to strengthen this tax, to provide the stable revenue Ohio needs and to ensure equity among taxpayers big and small.