BAT Proposed for Ohio

Published July 1, 2004

In May 4 testimony to the Ways & Means Committee of the Ohio House of Representatives, the president of the Dayton-based Buckeye Institute for Public Policy Solutions expressed support for, but also reservations about, a proposed new Ohio business activity tax (BAT).

Under an April 15 proposal, the Ohio corporate franchise tax and tangible personal property tax would be eliminated and replaced with a Business Activity Tax, which would be Ohio’s sole corporate tax. The proposed BAT base is a weighted combination of three components: a company’s sales in Ohio (60 percent), property (20 percent), and payroll (20 percent). Under the proposal, which would take effect in 2006, the tax rate would be approximately .71 percent.

Sam Staley, president of the Buckeye Institute, noted several reasons why the BAT under consideration in Ohio could be a positive reform measure. He noted,

  • The proposed tax would be based on the net book value of corporate property, allowing for depreciation and amortization to reflect the true economic value of the business.
  • The BAT would be a substitute tax, not another tax added on to the state’s current corporate tax system.
  • The proposal provides an income tax credit for owner-operator businesses, avoiding inequities between small (often subchapter S) firms and large firms.
  • The BAT helps make the state’s tax system more equitable by adopting a broader base.

Concerns, Too
While generally supportive of the BAT proposal, Staley expressed concern as well.

“The most significant concern with a BAT,” he testified, “may be the potential to substantially increase the tax burden. This potential exists because of a lack of transparency in its calculation. The base is not immediately obvious, requiring the addition of different components of business operations.

“This lack of transparency could allow policymakers to increase the tax rate in the future to generate higher tax revenues. Ohio’s direct experience with the income tax has created legitimate skepticism about new tax proposals and their potential to increase the overall tax burden over time. Although the BAT proposes a flat tax rate of 0.71 percent, the rate could easily increase, or become graduated, without some sort of constraint,” Staley continued.

According to Staley, the potential for using a BAT as a “stealth” tax increase could be eliminated if a tax and expenditure limitation, or TEL, were included as part of the reform package.

“A TEL could easily be modeled on Colorado’s successful initiative, limiting the growth of government spending on the state and local level to a fixed rate such as the inflation rate or personal income growth. All surplus revenues over a certain amount would be rebated to taxpayers, and multi-year surpluses could trigger permanent tax cuts,” Staley explained.

A TEL, Staley noted, would also be politically popular: “A poll of Ohio citizens by The Buckeye Institute found that 78 percent would favor a proposal to limit the rate of government spending growth to the inflation rate.

“Regardless of the potential pitfalls,” Staley continued, “I applaud the committee for taking up the issue of fundamental tax reform.

“Ohio currently has one of the highest state and local tax burdens in the nation. We need to be moving forward on creating a more competitive tax structure as well as reducing taxes overall in order to improve the state’s business climate. This is a valuable step toward starting a broader public debate on structural tax reform.”

John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].

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