Despite the positive findings of many other publications and organizations, the Tax Foundation State Business Tax Climate ranking has once again placed Ohio toward the bottom of the list. The Tax Foundation released its 2021 State Business Tax Climate Index report October 21, 2020, concluding Ohio ranks No. 39 among states. Similarly, a year ago the same report was released, placing Ohio at No. 38 for its tax system structure.
Comparing Tax Foundation Weights to Ohio’s Business Tax Policy
State and Local Business Taxes Breakdown (E&Y)
Tax Foundation Weights
Corporate Income Tax
Unemployment Insurance Tax
Individual Income Tax
Other Business Taxes*
*Other Business Taxes includes excise tax, business and corporate license, public utility tax, insurance tax, severance tax, and other taxes.
Understanding the Methodology
To understand how a business-friendly state like Ohio could rank toward the bottom of the report, it’s important to recognize that the Tax Foundation weighs tax types in a way which does not line up with the State and Local Business Taxes Breakdown as shown above.
The tax type weighted most heavily is Individual Income Tax at 30.5% of the overall score. Property Tax, the largest state and local taxes actually paid by businesses, carries the second lowest weight in the report at 14.8%.
The chart above shows the Tax Foundation analysis could be seen as deficient when comparing how much companies actually paid by each tax category from E&Y’s Total State and Local Business Taxes report. Further, The Tax Foundation’s report claims that Ohio is among the states with the lowest top rate for individual income tax at 4.797%, but ranks Ohio even behind those states they listed as having the highest income tax rate including Oregon (9.9%), Iowa (8.53%), and Vermont (8.75%).
What Makes Ohio Business-Friendly
The Tax Foundation’s ranking contradicts what business owners across the state know to be true: Ohio is a business-friendly state. In fact, Ohio is one of only a handful of states in the U.S. with no state level corporate income tax and no personal property tax.
Additionally, Ohio’s gross receipts tax is a low 0.26%, exempts the first $1 million in receipts, and is only levied on in-state sales. Ohio also has no inventory tax, no business personal property tax, and no business franchise tax. Ohio has lowered state personal income taxes in recent years. However, Ohio has a progressive income tax, creating an automatic disadvantage in the recent Tax Foundation rankings based on their metrics.
Taxes are not the only consideration for business operating costs. Businesses in Ohio would point out that this state is easily one of the best locations when all business cost factors are considered. Ohio has a skilled workforce of 5.6 million, competitive wages, central location, advanced infrastructure, and construction costs that are 8.5% lower than the U.S. average.
While the Tax Foundation may never come to see Ohio for the exceptional business climate that it has, Ohio’s reputation for being business-friendly is supported by countless positive rankings by other agencies, organizations, and publications across the nation and, perhaps most importantly, by the businesses that have chosen to grow within its boundaries.