Business Tax Revamp: A Deficit in the Making

The Ohio General Assembly in 2005 approved an overhaul of the state’s tax system. The law phases out two of the most significant taxes on business: The Corporate Franchise Tax on nonfinancial companies, which is the state’s corporate income tax, and the Tangible Personal Property tax, a local tax imposed on machinery, equipment, inventories, furniture and fixtures used in business in Ohio. It replaces them with a new Commercial Activity Tax (CAT), based on gross receipts in Ohio.

This January 2009 report, Business Tax Revamp: A Deficit in the Making, concludes that the business-tax swap has contributed importantly to the state’s budget deficit. It finds that businesses saved more than $500 million during the state’s 2008 fiscal year ended last June. Overall, when fully implemented, the business tax changes are likely to reduce state revenue by $1 billion or more a year.

The study reviews the effects to date of those changes on state and local government revenues, what the overhaul has meant for different types of companies and industries and how the effects have compared with how the reform was promoted. It analyzes available data on the size and industry of taxpayers paying the new CAT, their location, and the extent to which the tax revamp has affected economic development incentives. Finally, it makes recommendations for revitalizing the state’s business taxes.