COLUMBUS, Ohio — A new Ohio tax, part of a sweeping tax reform, may bring about what the current tax system has struggled to achieve: boost Ohio's lagging economy.
The Commercial Activity Tax (CAT), to be phased in over the next five years, essentially replaces the corporate franchise tax and tangible personal property tax, which will be phased out over the same time frame. Additionally, Ohio's sales tax has been lowered anywhere from 5.5 to 6.5 percent and the personal income tax rates will be incrementally reduced by 21 percent over five years. Economists are banking that this new tax structure will catch the eye of new Ohio businesses and potentially generate lower taxes for existing businesses, which ultimately would alleviate some of the state's economic woes.
"The CAT is part of a sweeping reform of Ohio's tax code that is largely driven by an accumulation of evidence over the years that Ohio was not an attractive place for new businesses," said Carl Zulauf," an Ohio State University Extension agricultural economist with the Department of Agricultural, Environmental, and Development Economics. "One of the reasons was that our previous tax code was not viewed as consistent with entrepreneurial activities, and so Ohio continually found itself the loser in attracting new businesses."
Compared to the rest of the country, Ohio's economic state is stale. Last year, the state ranked a paltry 47th in economic growth, according to the U.S. Department of Commerce's Bureau of Economic Analysis.
The Commercial Activity Tax is a business privilege tax that targets gross receipts received in an annual or calendar quarter time period. The CAT affects businesses such as sole proprietors, partnerships, corporations, and service providers with sales or rental properties that make $150,000 or more a year.
According to the Ohio Department of Taxation, businesses with gross receipts between $150,000 and $1 million a year are required to pay a $150 per year tax. Businesses that generate gross receipts of more than $1 million must pay the $150 fee plus 0.26 percent of their receipts. The new tax also applies to out-of-state businesses that meet certain criteria.
For the majority of small businesses, including many Ohio farmers, the CAT will have little direct effect, said David Kraybill, an OSU Extension economic development economist with the Department of Agricultural, Environmental, and Development Economics.
"The CAT won't have much of an impact on a lot of the farmers since many farms have less than $150,000 a year in gross receipts, and the bulk of farmers are making less than $1 million a year, so their taxes will not be large," said Kraybill. "It's possible that with the reduced personal income tax, these people could actually see their Ohio taxes go down."
According to the U.S. Department of Agriculture 2002 census, the average Ohio farm has $57,341 in annual farm sales and a net cash farm income of $8,929.
Reduced taxes for existing Ohio businesses and a more attractive market for new ones could bring significant economic changes for Ohio over the next several years.
"The CAT is a little like a consumption tax since it is spread broadly across most sectors of the economy, with the exception of service sectors. The idea of a consumption tax is that is encourages savings. While a consumption tax may dampen sales a little, the negative effect of this is offset by the additional savings that the tax encourages. Savings are essential for growth because they provide funds in the banking system for investment," said Kraybill. "Unlike the old tax system, which directly taxed capital goods, the CAT does not penalize investment. Also, it should be better for the economy because it does away with some of the selective special privileges that made the previous system inefficient."
Added Zulauf, "It's kind of neat to watch something play out that would theoretically enhance the competitiveness of the state of Ohio over time," said Zulauf. "It won't happen overnight and I have no doubt there will be some hiccups, but the potential is there to help Ohio overcome its economic problems."
Ohio businesses that are liable for the Commercial Activity Tax must register by Nov. 15 and pay a one-time refundable fee. For more information on CAT, log on to the Ohio Department of Taxation's Web site at http://tax.ohio.gov.