How tough is Ohio's tax burden on business?

3/20/2011

COLUMBUS -- Individual tax burdens for Ohioans are middle of the road compared to other states, according to the conservative Tax Foundation, but in assessing business taxes, it says Ohio is near the bottom.

Gov. John Kasich said in his recent State of the State address that "high taxation" chases businesses away to places such as Indiana.

So what about Ohio's tax burden is rough on businesses?

Local business owners say the primary levy on business, the Commercial Activity Tax, has done more harm than good since enacted in 2005 under Republican Gov. Bob Taft.

"It's a double tax," said Charlie Marshall, president of Grismer Tire in Dayton and a Kasich supporter. "You get charged $2,600 for every million in gross receipts despite whatever profits you have. Then on top of that, a lot of business owners are getting taxed on their own personal incomes."

The tax generated $1.3 billion (8 percent of the state's general fund revenue) in fiscal 2010. It replaced the Tangible Personal Property Tax, levied on inventory and equipment. Big manufacturing companies heralded the change; smaller retail businesses and grocery stores protested.

"It's a deterrent to most businesses," said Aaron Delidow, co-partner of the business brokerage firm Provest Properties Inc. of Dayton. "It forces small businesses to carry a higher tax burden. Add federal, state, and local taxes up, and you can easily have a small business owner making $250,000 a year with a 40 percent tax burden."

Mr. Kasich and Republican lawmakers have, so far, announced no plans to remove the tax.

During his campaign for governor, Mr. Kasich said he wanted to eliminate the state income tax. In fiscal 2010, the state took in $7.1 billion in income tax, nearly 45 percent of its general fund revenue.

Local government officials said eliminating the income tax would choke off millions of dollars for public safety and waste collection. They said it could result in higher local property taxes and other fees.

The Federation of Tax Administrators, the Washington-based research group representing tax administrators from across the county, ranked Ohio 20th highest in 2008, based on the percentage of personal income that goes for all state and local revenues, including taxes and fees. Ohio's percentage was 16.9, slightly above the national average of 16.4.

Ohio and neighboring states were closely bunched, with Michigan at 19th with 17 percent. Then came Ohio, followed by Indiana in 23rd place at 16.7 percent and Kentucky in 28th place at 16 percent.

The Tax Foundation, a nonpartisan Washington-based research group considered to be conservative-leaning, ranked Ohio 13th in 2009, with 10.2 percent of personal income going for state and local revenues, including taxes and fees. The national average is 9.9 percent.

A 2008 ranking by the Tax Foundation put Ohio in seventh place with 10.4 percent of personal income going to taxes, but that was revised, based on updates from the Census Bureau and other databases.

On the Tax Foundation measure, Ohio ranked higher than its neighbors. Kentucky came next, in 18th place at 9.8 percent, followed by Michigan in 24th at 9.6 percent and then Indiana in 28th at 9.4 percent.

The groups calculate the tax burdens differently.

The federation combines state and local taxes and fees and divides that by total personal income in the state.

The Tax Foundation seeks to measure the burden of state and local taxes on an individual regardless of where the tax burden originates and adds an ingredient to the mix of taxes paid in the home state, said Mark Robyn, a Tax Foundation economist.

For example, Alaska gets a big chunk of its tax revenues from oil companies, but the burden of those taxes is not paid just by Alaskans.

"It's passed on to consumers around the nation in higher prices," he said. The foundation projects how much of the burden should be attributed to the various states.

This system also takes into account sales taxes paid while someone is traveling in other states or real estate taxes paid in a state other than the taxpayer's home state, he noted.

In 2005, an all-Republican state government overhauled Ohio's state tax system with a primary goal of making it more business friendly.

Included was a 21 percent reduction in the personal income tax rates, phased in over five years. The last year of the phase-in was delayed a year to help balance the current state budget, which runs through June 30. The final rate change went into effect at the beginning of this year.

The 2005 legislation also phased out local property taxes on business machinery and equipment as well as the state corporate franchise tax on businesses. The business taxes were replaced by the Commercial Activity Tax.

Mr. Kasich says that if Ohioans want an example of how it's done right, or at least better, they only need to look immediately to the west.

Indiana's unemployment rate has fallen more rapidly than Ohio's in the last year and is slightly lower at 9.1 percent. Since October 2009, Indiana's job growth in the private sector has outpaced the country's two to one.

In the last few years, Indiana Gov. Mitch Daniels, a Republican, has reduced property taxes by nearly 30 percent while raising the sales tax to 7 percent. He also installed a private state economic development group similar to Mr. Kasich's JobsOhio.

It lured Honda Motor Co. and 1,500 jobs to Indiana instead of Ohio in 2006. In the last 10 years, The Blade has reported, 11 northwest Ohio companies closed and moved to Indiana.

Indiana's income tax is a flat 3.4 percent, compared with Ohio's top bracket of 6.24 percent. Ohio's Commercial Activity Tax levies 0.26 percent on gross receipts totaling more than $150,000 a year. Indiana has a flat corporate income tax of 8.5 percent.

Counties in Indiana also levy an income tax of less than 3 percent; in Ohio, cities have income taxes and townships are tax free.

Indiana had $12 billion in general fund tax revenue in 2010, Ohio $15.9 billion

Ohio business owners and consultants said incentives play just as big a role in landing businesses, and Ohio lags other states.

Indiana lured Honda with $85.5 million in tax credits, grants and infrastructure improvements, compared with Ohio's $71.7 million.

"The thing that is a mystery to me is Ohio has a lot of incentive programs that are out there that are aimed at driving behaviors like research and development," said Justin Stallard, a partner at the Dayton-area business consulting and accounting firm Battelle & Battelle. "Ohio's premise, you assume, is intended to drive business behavior, but they've missed the mark."