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As we recounted recently, Gov. Kasich signed House Bill 483 (HB 483) over the summer, authorizing tax cuts and new tax relief for low and middle income Ohioans, among other things. It did so by cutting small business taxes in half and accelerating the 10 percent personal income tax reduction originally scheduled to take effect in 2015.

 

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Gov. Kasich and other proponents have lauded HB 483’s achievements, such as new business and job creation. There has been skepticism as well. A Plain Dealer article reported that making up for the approximate $8 billion loss in revenue would “likely require the state to reduce spending, create new taxes or increase the rates on other existing taxes.”


In addition, last week, the Tax Foundation updated its 2015 State Business Tax Climate Index (Index), a tool that is designed to assess how states structure their tax systems and to provide a roadmap to improving the tax structures. The findings in the Index offer a counterpoint to the optimism put forth by HB 483’s supporters.


Ohio ranks #44 for its overall business climate


In its article accompanying the Index, the Tax Foundation acknowledged that businesses tend to locate in places where they have the greatest competitive advantage. In addition, states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. Beyond this, it noted that unlike changes to a state’s healthcare, transportation, or education systems, which can take decades to implement, changes to the tax code can quickly improve a state’s business climate. As a result, states that employ favorable tax structure offer the most direct and stiff competition to other states.


In light of the passage of HB 483, it is clear that Ohio’s Governor Kasich understands the importance of taxes relative to business development. Even so, the Tax Foundation’s Index reveals that Ohio is rated #44, the middle of the pack of the 10 least business friendly states. New Jersey is the least and Wyoming is the most business friendly.


Ohio’s rank in other tax categories


The article explains that the states in the bottom of the list, which include Iowa, Connecticut, Wisconsin, Ohio, Rhode Island, Vermont, Minnesota, California, New York, and New Jersey, hold these positions primarily because they have complex, non-neutral taxes with comparatively high rates.


When compared with other states, here is how Ohio stands in four other main tax categories (besides the overall state business climate rank):

  • Corporate tax structure: #26
  • Individual income tax structure: #47
  • Sales tax structure: #32
  • Property tax structure: #20
  • Unemployment insurance tax structure: #5


Ohio’s tax laws are difficult to understand and comply


According to a Plain Dealer story printed this week, Scott Drenkard, an economist with the Tax Foundation, said that despite the initiatives contained in HB 483, Ohio also raised the state sales tax to 7.25 percent and increased the state’s reliance on the commercial activities tax. Thus, Drenkard opined, Ohio ranks #44 overall because it has “some of the hardest taxes to comply with in the nation.” This is so because municipalities layer on their own taxes and rules. Consequently, certain taxpayers may be required to file dozens of separate year-end tax forms.


Ohio’s business community agrees that the requirements can be onerous. According to the above referenced Plain Dealer story, Ohio’s rank in the Index reflects widespread criticism by business owners, especially manufacturers, who complain that Ohio’s tax structure is too confusing and the taxes themselves are too high. Ryan Augsburger, the director of public policy for the Ohio Manufacturer’s Association, pointed out that the personal income tax structure affects businesses owned by individuals, some of whom are in the top tax bracket.


Implications


The Tax Foundation asserts that “states do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately, it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high tax states.”


Though the Index placed Ohio at #42 last year, two spots higher than this year, improvements can occur. Gov. Kasich’s goal of completely eliminating the income tax could help improve Ohio’s standing because the absence of a major tax, such as an income or corporate tax, is a feature common among the most business friendly states.

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