Businesses / Industry 

Tax Reform in Ohio

Major Components of Tax Reform Plan

Tangible Personal Property Tax
The tangible personal property tax - a property tax placed on physical property used in the general operations of a manufacturing or service-based business - is a revenue source that is utilized for funding a wide variety of governmental activities. However, this tax is widely viewed as a disincentive to capital investment and, as a result, is a roadblock to increases in personal and business productivity, income growth, and job creation in Ohio.

The tax reform plan mandates the elimination of the tangible personal property tax after the taxpayer’s tax year 2008. The first step to accomplish this goal is the elimination of the tax on manufacturers’ machinery and equipment placed in service in Ohio on or after January 1, 2005. The second step is to stabilize the listing percentage of existing general business tangible personal property at 18.75 percent (Tax Year 2006), then reduced to 12.5 percent in Tax Year 2007. The percentage will fall to 6.25 percent during Tax Year 2008, and then to 0 percent as of Tax Year 2009.

Corporate Franchise Tax
The corporate franchise tax (CFT) – an excise tax on a corporation’s net income, or “book value of assets” – was known as a fair, practical source of revenue for state and certain local governments. However, over the course of fifty-years, structural changes in the state’s economy combined with the proliferation of legal tax planning techniques has transformed the corporate franchise tax into a revenue source that is unproductive and inequitable with a high top marginal rate, a low rate of revenue collection, and numerous tax loopholes.

Therefore, the tax reform plan mandates the elimination of the corporate franchise tax. To accomplish this goal, the CFT will be phased-down by 20 percent per year over a five-year timeframe, with complete elimination of the tax by the end of Tax Year 2010

. The following is a summary of the reduction schedule:

• Tax Year 2006 = 80 percent of the net calculated corporate franchise tax
• Tax Year 2007 = 60 percent of the net calculated corporate franchise tax
• Tax Year 2008 = 40 percent of the net calculated corporate franchise tax
• Tax Year 2009 = 20 percent of the net calculated corporate franchise tax
• Tax Year 2010 = TAX ELIMINATED 
     

Personal Income Tax
The state personal income tax - an adjusted net income tax on individuals, small businesses, estates, and trusts - was first enacted in 1971 as a state revenue source. When first enacted in 1971, the tax had a rate schedule comprised of six brackets, with a bottom rate of 1.0-percent on income under $5,000 and a top rate of 3.5-percent on income over $40,000. By 2005, this rate schedule had grown to encompass nine brackets, with a bottom rate of 0.712-percent on income under $5,000 and a top rate of 7.5-percent on income over $200,000.

The Ohio tax reform plan calls for a reduction and restructuring of the state’s personal income tax. The main feature of the tax reform plan is a 21 percent reduction in the Ohio income tax rate schedule. This reduction, phased-in over five years at 4.2 percent per year, will result in a new top rate of 5.95 percent, which is a 21 percent reduction from the current top rate of 7.5-percent. In addition, the tax reform plan calls for the re-establishment of an accumulated trust income tax, the development of a new higher education grant program and the implementation of a new low-income tax exemption program.

     

Commercial Activity Tax
The Ohio tax reform plan calls for the implementation of a replacement business tax to help replace forgone state and local revenue resulting from the elimination of the tangible personal property tax on general businesses. This new tax – the commercial activity tax, or CAT– is an annual tax on the net gross receipts of a businesses’ activity within the state of Ohio. The CAT possesses a low rate (0.26 percent of gross receipts), a broad base (corporations and small business), and limited exemptions/credits (only four tax credits). As designed and structured, the CAT will not unfairly shift the tax burden to either businesses or individuals or unduly burden any one business sector or size of business within the state.

Under the tax reform plan, the CAT became effective beginning July 1, 2005. However, the full weight of the tax will be phased-in over a five-year period, at approximately 20 percent per year, with full implementation by April 1, 2009.

      

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