Should Ohio rethink the way it taxes businesses? Lawmakers weigh plan to eliminate state's main business tax
The coronavirus pandemic has been hard for Ohio businesses.
They've faced mandatory closures, capacity limits, staffing shortages and not surprisingly, revenue losses. But the one thing that hasn't changed is their state taxes.
Ohio, unlike most other states, doesn't have a corporate income tax. Instead, businesses pay taxes on their total receipts rather than their total profits.
"You could be losing money and still have to pay a tax," said Ulrik Boesen, senior analyst for a conservative nonprofit called the Tax Foundation. "This can be particularly damaging to struggling businesses."
That's why a pair of Republican lawmakers want to get rid of the Commercial Activity Tax or CAT. House Bill 234 would phase the CAT out over five years by reducing it 20% a year starting in 2022.
"We want to see businesses in our state succeed," Rep. Riordan McClain, R-Upper Sandusky, said. "But the CAT is making it harder to do so."
The CAT brings in about $2 billion a year by collecting a relatively small percentage (0.26%) of gross receipts from Ohio businesses.
The problem, Boesen said, is that quarter of percent hits differently depending on what kind of business you run.
Let's say a business sells $100 worth of items. It would pay $0.26 because of the CAT. That seems like a small amount on its face. But for a business with a 3% profit margin, that's 9% of its profits.
Basically, companies with higher profit margins pay a lower effective tax rate because of the way the CAT works, Boesen said.
Former Gov. Bob Taft even acknowledged this problem back when in 2005 when Ohio decided to switch to this way of taxing businesses. He said some businesses would pay more than others, but the CAT would "benefit all of us here in Ohio in the long run."
McClain and his cosponsor, Rep. Jennifer Gross, R-West Chester, think that hasn't been the case.
"The current 0.26% CAT rate is deceptively low," Gross told a committee earlier this month. "Its real economic effect is closer to a seven to 10% corporate income tax rate, which makes it one of the highest effective corporate taxes in the country."
The CAT is actually one of the big reasons why the Tax Foundation and other conservative groups rank Ohio near the bottom of their lists of tax-friendly states for businesses.
"Why would a business make a new investment in the state when they can go to Indiana and pay much lower rates," Boesen said.
What might replace Commercial Activity Tax?
Getting rid of the CAT isn't a terrible idea, said Zach Schiller, the research director for left-leaning think tank Policy Matters Ohio. "I don’t want to come across as thinking the CAT tax is the best thing around."
But the biggest concern he had was that HB 234 doesn't offer an alternative.
The tax brings in about $2 billion a year. That's about 6.5% of state revenues. Gross said she thinks Ohio's projected growth over the next five years would make up that loss but both Schiller and Boesen didn't think so.
"You'd likely have to do some spending cuts if you don’t want to replace the tax," Boesen said.
Schiller took it a step farther by pointing out that the CAT, which became Ohio law back in 2005, ushered in significant business tax cuts when it passed. Billions of dollars that had once gone to local governments and public schools disappeared.
"If you wonder why school districts find themselves less able to finance their operations, well, they lost that source of revenue," Schiller said.
And a lot of small businesses don't actually pay the CAT. Companies with less than $150,000 in gross receipts don't pay the tax at all, and those whose sales totaling $1 million or less pay a flat fee of $150.
Only about a third of businesses eligible for the CAT actually pay that 0.26%, according to data from the Ohio Department of Taxation.
"Who is complaining about this? Who are the actors who are sparking this," Schiller said. "It’s unlikely to be small business."
The Ohio Chamber of Commerce and National Federation of Independent Business declined to comment on the proposal.
Ohio also just cut personal income taxes by $1.64 billion and rewrote the way it funds public schools. Something Rep. Mark Fraizer, a Newark Republican, pointed out during HB 234's first hearing.
"There’s a lot of moving pieces right now in the state budget ...," Fraizer said. "Doesn’t it make sense to let these other items bake in and then address the CAT?"
Anna Staver is a reporter for the USA TODAY Network Ohio Bureau, which serves the Columbus Dispatch, Cincinnati Enquirer, Akron Beacon Journal and 18 other affiliated news organizations across Ohio.