What’s the Worst Tax in Ohio?

In 2005 during Ohio’s last major tax reform package, some organizations were saying the commercial activity tax (CAT) was not only unconstitutional, but that it would disproportionately fall on industries that have lower profit margins. The overall reaction from opponents to the CAT was as if policy makers were taking their first born. But looking at the big picture, it’s not the worst kind of tax.

As an organization, American Freedom Builders believes in low taxes and smaller government. We also believe in providing an unbiased analysis of policy.

In 2005 during Ohio’s last major tax reform package, some organizations were saying the commercial activity tax (CAT) was not only unconstitutional, but that it would disproportionately fall on industries that have lower profit margins. The overall reaction from opponents to the CAT was as if policy makers were taking their first born. But looking at the big picture, it’s not the worst kind of tax.

Ohio’s $0.26 CAT is a tax on business gross receipts. Unlike a corporate income tax, which is imposed on a business’ profits, a gross receipts tax is imposed on a business’ total sales of goods and services, with no deduction for the cost of doing business.

Businesses with low profit margins, such as grocery stores, don’t like the CAT at face value because they say it “disproportionately” affects their industry. So let’s say you buy a carton of ice cream. The few dollars you pay then goes to cover the general cost of goods used to make the ice cream, distribution, and operations, leaving little wiggle room for profit. Even though the rate itself is low, opponents of the CAT believe it eats into businesses with skinny profit margins, big sales volumes and a lot of layers of suppliers.

Ohio’s CAT was designed as a broad-based, low rate tax that applies to most business types (e.g., service providers, retailers, and manufactures). The CAT phased out the state corporate franchise tax and local tangible personal property tax for businesses. Nevertheless, some industries still claim CAT spilt the milk.

Small businesses, which are the drivers of economic growth, don’t have to pay the CAT. The CAT only affects medium and large businesses grossing more than $1 million in receipts. And businesses with less than $150,000 in annual sales don’t pay any tax, while companies with less than $1 million pay a flat $150 in taxes.

Also, most small business owners are set up to book any profits as personal income. When starting out, a business can pay less in taxes if they set up as a sole proprietor. So once a small business owner decides to take a profit, a trim personal income tax rate would make a difference. There are approximately 52,000 companies in Ohio that gross over $1 million.

At the Federal level, corporate tax contributions in America have shrunk in the past several decades while personal taxes have risen to fill the gap. For example, the total corporate contribution to Federal revenue has dwindled from 32 percent in 1950 to about 17 percent today. This means about 63 percent of the Federal revenue comes from individual Americans, up from 45 percent in 1950 – a forty percent increase.

In Ohio, the largest source of tax revenue is its individual income tax which is about 39.9 percent of tax revenue. About 34.7 percent of its revenue is from sales and use tax. One of the smallest sources of Ohio’s tax revenue is the CAT at 7 percent. And from fiscal year 2012 to fiscal year 2013, personal income tax revenue increased over 8 percent. Isn’t the prudent thing to lower the tax rate for individuals who shoulder the bulk of taxes?

Cutting taxes requires steady reform and modernization. Already, Ohio’s political leaders have cut taxes significantly by over $3 billion. Reducing personal income taxes, a middle-income family earning between $40,000 to 80,000 a year can now keep and additional $250 of their money. Low-income families earning less than $40,000 can keep $500 more a year of their money.

Moving Ohio forward requires bold action. Policies that make Ohio attractive for business must also make Ohio attractive for individuals. There isn’t a one size fits all approach when it comes to making Ohio thrive. To attract more jobs, Ohio leaders must do more. Proper consideration must be paid to Ohio’s tax structure as a whole, and not just one part, because the worst kind of tax is not looking at the big picture.

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