The Ohio Manufacturers Association asks a good question: Before increasing the commercial activity tax on businesses, why not look at erasing the exclusions, credits and exemptions that lawmakers have applied to the tax? In that way, the state would protect the low rate and preserve the broad base, two elements of a sound tax system.
The association responded to a proposal in the mid-biennium review of John Kasich. The governor wants to make another reduction in state income tax rates, by 8.5 percent during the next three years. As part of covering a large portion of the expense, he has called for increasing the commercial activity tax from 0.26 percent to 0.30 percent, generating a projected $196 million in 2015 and $269 million in 2016.
Worth adding is that the Kasich team describes the increase as an “updating,” noting that the tax has not changed since its inception in 2005. The description reinforces the notion that the governor will increase other taxes in the pursuit of lowering income tax rates, believing, contrary to most evidence, that such reductions are key to delivering enduring growth and job creation.
The commercial activity tax applies to gross receipts. It is a replacement for the corporate franchise tax, a levy on business profits that had become riddled with tax breaks, many companies rightly complaining about the inconsistent application. In going to the CAT, lawmakers also reduced substantially the tax burden on businesses, by roughly $1 billion a year.
As they did with the corporate franchise tax, lawmakers proceeded to carve holes in its successor, no matter the eased burden and low rate. The manufacturers association cites two dozen breaks, including relief for casino receipts in excess of gross casino revenue, for grain handlers and a qualified distribution center. Perhaps some are justified. All told, they add up to more than $373 million a year.
So, yes, there is an opportunity for assessing the value of tax breaks to see whether some might be closed to avoid a tax increase. If anything, the thinking should be applied more broadly.
In all, the state dishes $7.7 billion a year in various exemptions, deductions, credits and exclusions. Reduce the sum by just 10 percent, and the state would have nearly $800 million to invest in such priorities as public schools and universities. Yet the state lacks even a process for examining regularly these tax breaks, or tax expenditures. Thus, some breaks, dating back decades, have not been assessed by lawmakers to determine whether they still have value, the state, year after year, springing for the cost, so much runaway spending.
Among other states, Washington has an automatic review process, all tax breaks expiring in 10 years unless they are renewed, the purpose of each spelled out, along with goals and measures. Ohio should do the same.
If there is much to debate about the shape of the state tax code, there surely is room for agreement on something as practical and responsible as evaluating the effectiveness of the many tax breaks the state makes available. If they prove outmoded or obsolete, then close them and put the resources to better use.