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Published: Monday, 3/21/2005

Business taxes: Can Taft find a compromise?

COLUMBUS - Two years ago, Gov. Bob Taft said he wanted to add dozens of services to the Ohio sales tax base.

The legislature responded by raising the sales tax rate from 5 percent to 6 percent.

Now Mr. Taft says he wants a "broad-based, low-rate" business tax.

Does he really want the legislature to heal the corporate franchise tax?

Some big manufacturers hope so.

DaimlerChrysler has taken a taste of Mr. Taft's proposed gross receipts tax - which the governor calls the commercial activity tax, or CAT - and coughed up a hairball.

The auto maker has "serious concerns" about a gross receipts tax, said Ed Saenz, a DaimlerChrysler spokesman.

"It would increase the cost of our vehicles produced and sold in Ohio by much more than the [0.26 percent] rate. It would create a 'pyramiding' effect that would be burdensome to our industry, not just to ourselves," he said.

"Pyramiding" would occur because the gross receipts tax would kick in several times - when manufacturers buy their raw materials from suppliers and when they sell their products to other businesses.

The Ohio Business Roundtable has played a leadership role in the push for a gross receipts tax. DaimlerChrysler allowed its membership to lapse last year, Mr. Saenz said.

"It was a service that was not valued to us anymore," he said.

When asked if the push for a gross receipts tax was the reason, Mr. Saenz said that wasn't the chief factor, but "it would have figured into it."

This isn't to say that DaimlerChrysler is opposed to everything Mr. Taft wants to do.

The auto maker, for example, supports the governor's call for the legislature to reduce personal income tax rates by 21 percent over five years.

Although Toledo-based Dana Corp. is a member of the Ohio Manufacturers' Association, it has not joined the group's support for Mr. Taft's gross receipts tax.

"If the profitability of a business declines, the Commercial Activity Tax will eat into the capital of that business," said Edward McNeal, Dana's vice president of government relations.

Also, under Ohio's corporate franchise tax, net operating losses may be deducted against taxable income in the first subsequent year a company generates taxable income, Mr. McNeal said.

If a company does not generate sufficient taxable income to fully deduct the net operating losses against, they may be carried forward to subsequent years to offset taxable income, he said.

Because of the downturn in the auto industry and increased global competition, Dana will have a combined Ohio net operating loss of about $16 million to carry forward to calendar year 2005, Mr. McNeal said.

If the legislature approves the gross receipts tax, public companies like Dana would be required to remove the deferred tax assets related to the Ohio corporate franchise tax off their books, he said.

"This will result in dire consequences for Dana Corp. and similarly situated Ohio businesses," Mr. McNeal said.

Ford Motor Co. has applauded Mr. Taft's proposal to phase out most of the tangible personal property tax over five years.

Ohio is among 12 states that continue to tax inventory, said Tim Timmerman, Ford's director of state and local income taxes.

But Mr. Timmerman said the gross receipts tax won't improve Ohio's economy.

"The Commercial Activity Tax would be a tax increase on our Ohio-based facilities and on our Ohio-based suppliers," said Mr. Timmerman. "Ford would ultimately absorb this cost as a direct reduction in our profit margins, which would impair our ability to hire or retain workers and to make additional capital investment."

Critics of Ohio's corporate franchise tax have said sophisticated tax-planning has turned it into a "sieve."

It is levied on the value of a corporation's issued and outstanding shares of stock. The corporations pay based on their net worth or net income - whichever produces more taxes.

Mr. Timmerman said Ford has had several years of tax losses and has paid "minimal" corporate franchise taxes.

But Ford still pays a "disproportionate" amount of other taxes, such as the tangible personal property tax, compared to other industries, Mr. Timmerman said.

"When all other taxes that Ford paid over a recent 10-year cycle are considered, we paid more in tax than we had in Ohio taxable income. Ohio's tax structure needs to become more competitive to encourage investment in the state," he said.

The Ohio Chamber of Commerce has proposed revising the corporate franchise tax to expand the base and lower the rates, and also enacting a new business privilege/license tax.

The chamber's plan would change the apportionment of the corporate franchise tax to 100 percent sales. Currently, it is 60 percent sales, 20 percent property, and 20 percent payroll. The net income tax base rate would decline from 8.5 percent to 7.5 percent.

As Democrat Tim Hagan said during the 2002 governor's race, Mr. Taft does not defy his class.

With businesses split on the gross receipts tax, is there a compromise the governor can embrace?



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