Ohio’s Tax Policy About Results, Not Philosophies
Doing what actually works, not what is assumed to work
Matt Waldo, senior manager of research and analysis, JobsOhio•Published: Wed Jun 19 2019
This blog has been updated. Click here to read the most current version.
Ohio’s economic and business climate continues to receive national attention. For example, Ohio has been ranked top 10 in Chief Executive’s Annual CEO Survey of Best States for Business in each of the past two years. Yet, depending on the source, the growth and success of the state is up for debate. On Sept. 28, 2018, the Tax Foundation’s 2019 State Business Tax Climate Index ranked Ohio 42nd for the structure and complexity of its tax system. While this would appear to put Ohio in a negative light, it’s time to set the record straight and tell the story of Ohio’s true tax reality.
The Tax Foundation, which bills itself as “the nation’s leading independent tax policy nonprofit,” approaches tax policy by looking at the complexity of state tax systems, not how those systems actually affect business performance.
The Tax Foundation’s mission is to “simplify” tax policy, which it expresses as a preference for single rate systems. When a state’s tax policy doesn’t align with this philosophy, the Tax Foundation gives it a negative ranking in its reports. For example, states with more than two tax tiers are given lower scores, regardless of how businesses in that state are actually performing.
Additionally, the weight that the Tax Foundation places on specific tax categories does not reflect the actual proportion of taxes paid. Individual income tax is the heaviest-weighted factor in the report at 30.1 percent of the overall score, while property taxes, a corporation’s largest local tax in the U.S. according to Ernst & Young, carry the second lowest weight in the report at 15.4 percent.
In Ohio, small business is the driver of job creation. That is why in recent years there has been continuous work to lower the tax burden on these businesses, especially for those who register as an LLC or S-corporation. For the taxable year 2016 and forward, the business income deduction enables a business owner who files single or married jointly to deduct 100 percent of business income up to $250,000 from the adjusted gross income reported on their Ohio personal income tax return. Married couples filing separately can deduct 100 percent of business income up to $125,000. Any remaining business income above these thresholds is taxed at a flat 3 percent rate.
Further, the Tax Foundation prefers corporate income taxes over a gross receipts tax, despite the fact that Ohio’s Commercial Activity Tax (CAT) achieves the foundation’s goals for low, single-rate and broad-based taxation. Ohio’s CAT is a gross receipts tax at a single low rate of .26 percent on in-state sales; out-of-state-sales are exempt.
In contrast, JobsOhio relies on analysis from organizations with decades of experience in tax practice, including Ernst & Young, PricewaterhouseCoopers, KPMG, Deloitte and others. These respected tax organizations, as well as the results we see across the state, indicate that Ohio is one of the best states in the nation in which to do business.
The choices of companies to locate, stay and grow in Ohio are no coincidence, and run counter to the Tax Foundation’s analysis. In 2019, Site Selection magazine’s Governor’s Cup rankings awarded Ohio the No. 2 spot overall for total projects for the fifth consecutive year. Ohio has the fifth largest number of Fortune 500 and Fortune 1000 company headquarters. Ohio also led the Midwest by attracting the eighth-highest amount of venture capital in the U.S. in 2018.
In fact, Ohio’s business-friendly tax climate, which has been in place since 2005 and has enjoyed bipartisan support, continues to stimulate company growth, job creation and profitability. With the lowest tax burden in the Midwest, Ohio’s tax structure means no tax on:
- Corporate profits
- Tangible personal property
- R&D investments
- Products sold to customers outside Ohio
Ohio’s tax policy is about results, not philosophies, and we’ve made great strides in creating a pro-business climate and tax structure. The success of businesses in Ohio is evidence that our system is working.