New Tax Foundation report shows Ohio still has work to do reforming taxes

Greg R. Lawson Sep 28, 2016

Ohio policymakers have worked hard over the last decade to reduce our state’s previously high and onerous personal income tax rate. However, according to the non-partisan Tax Foundation's latest Business Tax Climate report, these encouraging reforms still leave much to be desired in the Buckeye State.

The Tax Foundation’s report examines the structure and complexity of states’ tax systems and then assigns them a ranking relative to their peers. Ohio ranks a poor 45 nationally. This was unchanged from last year after accounting for methodological refinements. The major factors driving this low score are Ohio’s gross receipts tax, known as the Commercial Activities or CAT tax, and the state’s uniquely bad municipal income tax. 

Ohio’s CAT is a problematic tax. In the simplest terms it taxes businesses and takes no account of their profitability. Thus, high-volume, low-margin businesses are particularly impacted in an adverse way. This creates an inherent inequity across differing types of taxpayers, which flies in the face of good tax policy. This is at the core of the Tax Foundation critique of the CAT. 

Additionally, it has been used to levy taxes on businesses that do not even have a physical presence in Ohio, but have customers in Ohio. In fact, The Buckeye Institute has even filed an amicus brief in the Ohio Supreme Court arguing that this application of the CAT violates the commerce clause of the U.S. Constitution.

For more details on its structure, visit the CAT page at the Ohio Department of Taxation website.

As for the municipal income tax – which is often over 2 percent of income in addition to the state rate – The Buckeye Institute, the Tax Foundation, business groups, and anyone with any understanding of decent tax policy have long criticized it. 

First, and foremost, it opens the door to double taxation. A person is taxed where they work, but if their home community chooses not to offer a 100 percent credit for taxes already paid to another municipality, that worker gets taxed again on the same dollar earned! Few things could be more unfair to a taxpayer than this indignity. Few things could also be a worse disincentive to work and earn more than this backwards policy that does not exist in any other state in the nation.

But that is just the tip of the iceberg. 

There used to be no standardization as to what is included in the tax base. It used to require businesses working in multiple jurisdictions to file W-2s everywhere they worked even if the tax liability was less than the cost of filing a return. It had no standardized operating loss (NOL) carry-forward, which puts different businesses on an inherently unlevel playing field. Some of these flaws have been slightly ameliorated by the passage of House Bill 5 at the end of the last General Assembly. But they are not entirely eliminated, nor did HB 5 do anything to resolve the double-taxation issue.

Some of our past efforts to explain the complex and uniquely bad tax includes an op-ed in the Columbus Dispatch, a joint piece with the Tax Foundation at Forbes, and in testimony before legislative committees.

The Buckeye Institute has applauded moves by Gov. Kasich and the General Assembly to reduce the state personal income tax and shift more to consumption taxes. We have testified to this effect during the budget process.

However, more can be done. First, Ohio should not increase the CAT rate. While the present tax has myriad flaws as previously described, the one ray of sunshine is that the rate itself is low. Past efforts to increase that rate have rightly been resisted by the General Assembly and should be denied again if they re-emerge.

Second, Ohio must do more with the cumbersome municipal income tax. Fixing the double tax problem and embracing a more robust NOL should be paramount.

Third, Ohio should continue reforming the state income tax and do so in a methodical, predictable way paid for through long-term fiscal restraint.

If Ohio can really get to the point where its combined state and local tax structure is pro-growth, simple, transparent, fair, and equitable, as we outlined in our Tax Reform Principles for Ohio report, the Tax Foundation will take notice. More importantly, Ohio businesses will take notice, and we can continue to improve our ability to create more, better, and higher-paying jobs that will lift up Ohioans from all walks of life.