Report takes in-depth look at Ohio tax complexity

Written on Jun 16, 2017

By Gary Hunt, senior content editor

A complex tax system that is a burden for individuals is harming Ohio’s business climate.

That was the conclusion of a report released recently by the Tax Foundation, which rates the Buckeye State’s tax environment 45th among the 50 states.

Morgan Scarboro, policy analyst for the Tax Foundation, said the foundation’s conclusion is based mostly on the structure of the tax code.

“Ohio ranks poorly primarily because of a complexity problem,” she said. “When we’ve visited Ohio, we’ve had people ask us why the state’s ranking in the individual income tax part of our index hasn't improved, because you’ve been cutting the tax rate. Well, our index looks at the combined state and local rates, and those can really add up.”

The Tax Foundation produced the report in conjunction with the Buckeye Institute, and lays out its findings in a beautifully illustrated 52-page booklet that it is distributing to business groups, the news media, legislators and other interested parties.

TaxFoundationMuni1706In a graphic Scarboro called “the most illustrative in the book,” (shown at right) the report demonstrates how a fictional taxpayer in Beachwood could pay almost 9.5% in state and local income taxes.

“That puts Ohio even with states like New Jersey or New York, which you think of as high-tax states,” Scarboro said. “And we’ve actually met someone who faces a higher marginal rate than this because of the school district taxes.”

Economist Scott Drenkard, who is director of state projects for the Tax Foundation, said the report is “a conversation starter," and that the foundation aims to eventually produce one for each state. (Ohio’s is the seventh.)

“We want to seek a little bit of consensus on what the problems are,” Drenkard said. “We’ve got plenty of ideas on solutions, but we’re not making hard sells on solutions in this particular publication.”

The report compares Ohio directly with Illinois, Indiana, Michigan, Pennsylvania and Texas – states the Foundation says it hears Ohioans use most often as benchmarks. On the positive side, Ohio boasts a lower cost of living compared to all those states: the real value of $100 is $112 here, compared, on the low side, to just $99 in Illinois. Negatives include an aging population and population loss, particularly among college-educated people.

We’ve told you about the Ohio Tax Reform Task Force, formed by OSCPA in 2015 to help state leaders evaluate Ohio's tax structure and competitiveness. The Tax Foundation’s findings largely mirror the task force’s, particularly regarding complexity and the municipal income tax system, which Drenkard said “is the worst in the country.”

The Tax Foundation differs with OSCPA’s position in a couple of areas, notably on sales tax on services and on the Commercial Activity Tax (CAT). In an economy that is becoming more service-based, Scarboro said Ohio’s sales tax distorts the markets by “inherently favoring services over goods.”

“Services are the most progressive part of consumption,” Drenkard said. “Higher income individuals tend to buy more services than lower income individuals as a percentage of their income, so we view tax on services as a necessary long-term solution.”

The Ohio Society’s counter-argument is that a sales tax on services would put Ohio at a competitive disadvantage to neighboring states – particularly for businesses near a border – and would introduce extreme complexity for many professionals, including CPAs.

The Tax Foundation also favors a traditional corporate income tax over Ohio’s CAT, which is used in just four other states. But lawmakers have largely followed OSCPA’s advice to avoid carve-outs and maintain a broad base, a position Drenkard praised.

“Ohio is probably the best of any state that levies one, because it’s run very well, and it seems to be a coalition of the willing,” he said. “Just don’t fill it up with a bunch of credits and don’t bifurcate that thing.”

You can read the Tax Foundation report in its entirety at taxfoundation.org. And you can get a refresher on OSCPA’s positions here.

Related: Opinion: Ohio needs to simplify convoluted tax system | Columbus Dispatch, June 18, 2017

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