On January 1, 2006, businesses in Ohio began operating under a reformed tax code. The reforms were designed to modernize the state’s tax laws and make Ohio a more attractive place to locate and expand a business. Over the course of the next four years, corporate franchise and personal property taxes will be eliminated. The corporate franchise tax rate will be reduced by 20% each year until it is fully eliminated by 2010. Personal property taxes on machinery and equipment, furniture and fixtures, and inventory will also be phased out over time. Taxes on these items will be eliminated by 2009, although all machinery and equipment purchases made after January 1, 2005, are already exempt. Additionally, tax reform also included a reduction in personal income tax rates by 21% for all brackets over five years with the rate on the highest tax bracket falling from 7.5% to 5.925% by 2009.
These taxes are being replaced by the Commercial Activity Tax (CAT Tax), which subjects companies to a 0.26% tax on gross sales receipts in Ohio over $1 million. Receipts below $150,000 are exempt and receipts on the first $1 million are taxed at a flat rate of $150 Thus, a company will pay $26 in tax on every $10,000 in sales over $1 million. The CAT Tax is also being phased in over time as the personal property and corporate franchise taxes phase out.
According to Lt. Gov. Bruce Johnson’s testimony to the House Finance and Appropriation’s committee, these changes are designed to strengthen Ohio’s climate for business and job creation. The reform lowers tax rates while broadening the base to which they are applied. The changes are also intended to encourage capital investment and job creation by shifting the tax burden from investment to consumption.
State Representative Joseph Uecker (R-Miami Township) underscores the use of tax reform as a tool to encourage investment and create jobs. He stated that the legislature had known for some time that the current tax code was not working. With a high franchise tax rate but low collections, it was discouraging businesses from locating in Ohio. Overall, he has found that most manufacturers and business owners in his district are happy with the changes, although they have created problems for a few specific industries. He does not anticipate major additional changes to the code in the future, but he hopes that the legislature can work something out for high volume, micro margin businesses.
Certified Public Accountant Steve Hood of Kamphaus, Henning & Hood in Union Township was more reserved in his assessment of the reform’s impact. He noted that the impact varied depending on the nature of the business. For many small business owners, reductions in personal income tax will be offset by the loss of a 10% real property tax rollback. Because the small and medium-sized businesses he works with tend not to have significant amounts of personal property, they will not see gains from a reduction in that tax.
While companies begin to determine the impact these changes will have on them, tax reform is already being used as a key component for marketing Ohio to out-of-state businesses. Information on the reform has been featured on the website www.OhioMeansBusiness.com as well as in the "Why Ohio" ad campaign in magazines such as Forbes and Business Week.
Also In This Issue
Sign up now!
Want to subscribe to this newsletter? Send us an email at biz@co.clermont.oh.us.